SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________ To___________________.
Commission file number 0-15087
HEARTLAND EXPRESS, INC.
(Exact name of registrant as specified in its charter)
Nevada 93-0926999
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
2777 Heartland Drive
Coralville, Iowa 52241
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 319-545-2728
Securities Registered Pursuant to section 12(b) of the Act: None
Securities Registered Pursuant to section 12(g) of the Act: $0.01 Par Value
Common Stock
The above securities are registered on The NASDAQ National Market.
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 Act).
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the registrant's definitive proxy statement
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the shares of the registrant's $0.01 par value
common stock held by non-affiliates of the registrant was approximately
$828,829,000 based on the average closing bid and asked price of common stock on
June 30, 2004, which is the last business day of the registrant's most recently
completed second fiscal quarter. In making this calculation the issuer has
assumed, without admitting for any purpose, that all executive officers and
directors of the registrant, and no other persons, are affiliates.
The number of shares outstanding of the Registrant's common stock as February
28, 2005 was 75,000,000.
Portions of the Proxy Statement of Registrant for the Annual Meeting of
Stockholders to be held on May 12, 2005 are incorporated in Part III of this
report.
TABLE OF CONTENTS
Page
Part I
Item 1. Business 1
Item 2. Properties 4
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 27
Item 9A. Controls and Procedures 27
Item 9B. Other Information 28
Part III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management 28
Item 13. Certain Relationships and Related Transactions 28
Item 14. Principal Accounting Fees and Services 28
Part IV
Item 15. Exhibits, Financial Statement Schedules 29
PART I
ITEM 1. BUSINESS
General
Heartland Express, Inc. ("Heartland" or the "Company") is a short-to-medium
haul truckload carrier based near Iowa City, Iowa. The Company provides
nationwide transportation service to major shippers, using late-model equipment
and a combined fleet of company-owned and owner-operator tractors. The Company's
primary traffic lanes are between customer locations east of the Rocky
Mountains, with selected service to the West. Management believes that the
Company's service standards and equipment accessibility have made it a core
carrier to many of its major customers.
Heartland was founded by Russell A. Gerdin in 1978 and became publicly
traded in November 1986. Over the eighteen years from 1986 to 2004, Heartland
has grown to $457.1 million in revenue from $21.6 million and net income has
increased to $62.4 million from $3.0 million. Much of this growth has been
attributable to expanding service for existing customers, acquiring new
customers, and continued expansion of the Company's operating regions.
In addition to internal growth, Heartland has completed five acquisitions
since 1987 with the most recent in 2002. In June 2002, the Company purchased the
business and trucking assets of Chester, Virginia based truckload carrier Great
Coastal Express. The Company serves its customers in the mid-Atlantic region
from the terminal located in Chester. These five acquisitions have enabled
Heartland to solidify its position within existing regions, expand its customer
base in the East and Northeast United States, and to pursue new customer
relationships in new markets.
Heartland Express, Inc. is a holding company incorporated in Nevada, which
owns all of the stock of Heartland Express Inc. of Iowa, Heartland Equipment,
Inc., and A & M Express, Inc.
Operations
Heartland's operations department focuses on the successful execution of
customer expectations and providing consistent opportunity for the fleet of
employee drivers and independent contractors, while maximizing equipment
utilization. These objectives require a combined effort of marketing, regional
operations managers, and fleet management.
The Company's operations department is responsible for maintaining the
continuity between the customer's needs and Heartland's ability to meet those
needs by communicating customer's expectations to the fleet management group.
They are charged with development of customer relationships, ensuring service
standards, coordinating proper freight-to-capacity balancing, trailer asset
management, and daily tactical decisions pertaining to matching the customer
demand with the appropriate capacity within geographical service areas. They
assign orders to drivers based on well-defined criteria, such as driver safety
and United States Department of Transportation (DOT) compliance, customer needs
and service requirements, equipment utilization, driver time at home,
operational efficiency, and equipment maintenance needs.
Fleet management employees are charged with the management and development
of their fleets of drivers. Additionally, they maximize the capacity that is
available to the organization to meet the service needs of the Company's
customers. Their responsibilities include meeting the needs of the drivers
within the standards that have been set by the organization and communicating
the requirements of the customers to the drivers on each order to ensure
successful execution.
Serving the short-to-medium haul market (525-mile average length of haul in
2004) permits the Company to use primarily single, rather than team drivers and
dispatch most trailers directly from origin to destination without an
intermediate equipment change other than for driver scheduling purposes.
Heartland also operates seven specialized regional distribution operations
near Atlanta, Georgia; Carlisle, Pennsylvania; Columbus, Ohio; Jacksonville,
Florida; Kingsport, Tennessee; Chester, Virginia and Olive Branch, Mississippi.
These short-haul operations concentrate on freight movements generally within a
400-mile radius of the regional terminal, and are designed to meet the needs of
significant customers in those regions.
1
Dispatchers at the regional locations handle these operations, and the
Company uses a centralized computer network and regular communication to achieve
system-wide load coordination.
The Company emphasizes customer satisfaction through on-time performance,
dependable late-model equipment, and consistent equipment availability to serve
large customers' volume requirements. The Company also maintains a high trailer
to tractor ratio, which facilitates the stationing of trailers at customer
locations for convenient loading and unloading. This minimizes waiting time,
which increases tractor utilization and assists with driver retention.
Customers and Marketing
The Company targets customers in its operating area that require multiple,
time-sensitive shipments, including those employing "just-in-time" manufacturing
and inventory management. In seeking these customers, Heartland has positioned
itself as a provider of premium service at compensatory rates, rather than
competing solely on the basis of price. Freight transported for the most part is
non-perishable and predominantly does not require driver handling. We believe
Heartland's reputation for quality service, reliable equipment, and equipment
availability makes it a core carrier to many of its customers.
Heartland seeks to transport freight that will complement traffic in its
existing service areas and remain consistent with the Company's focus on
short-to-medium haul and regional distribution markets. Management believes that
building additional service in the Company's primary traffic lanes will assist
in controlling empty miles and enhancing driver "home time."
The Company's 25, 10, and 5 largest customers accounted for 59.3%, 44.1%,
and 32.9% of revenue, respectively, in 2004. The Company's primary customers
include retailers and manufacturers. The distribution of customers is not
significantly different from the previous year. One customer accounted for 13.7%
of revenue in 2004. No other customer accounted for as much as ten percent of
revenue.
Seasonality
The nature of the Company's primary traffic (appliances, automotive parts,
consumer products, paper products, packaged foodstuffs, and retail goods) 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.
Drivers, Independent Contractors, and Other Personnel
Heartland's workforce is an essential ingredient in achieving its business
objectives. As of December 31, 2004, Heartland employed 2,850 persons. The
Company also contracted with independent contractors to provide and operate
tractors. Independent contractors own their own tractors and are responsible for
all associated expenses, including financing costs, fuel, maintenance,
insurance, and taxes. The Company historically has operated a combined fleet of
company and independent contractor tractors. Management believes that a combined
fleet compliments the Company's recruiting efforts and offers greater
flexibility in responding to fluctuations in shipper demand.
Management's strategy for both employee and independent contractor drivers
is to (1) hire the best; (2) promote retention through financial incentives,
positive working conditions, and targeting freight that requires little or no
handling; and (3) minimize safety problems through careful screening, mandatory
drug testing, continuous training, and financial rewards for accident-free
driving. Heartland also seeks to minimize turnover of its employee drivers by
providing modern, comfortable equipment, and by regularly scheduling them to
their homes. All drivers are compensated for empty miles as well as loaded
miles. This provides an incentive for the Company to minimize empty miles and at
the same time does not penalize drivers for inefficiencies of operations that
are beyond their control.
Heartland is not a party to a collective bargaining agreement. Management
believes that the Company has good relationships with its employees.
2
Revenue Equipment
Heartland's management believes that operating high-quality, efficient
equipment is an important part of providing excellent service to customers.
Company-owned and owner-operator tractors are equipped with satellite
communications systems manufactured by Qualcomm. The satellite technology allows
for efficient communication with our drivers to accommodate the needs of our
customers. A uniform fleet of tractors and trailers are utilized to minimize
maintenance costs and to standardize the Company's maintenance program. Tractors
purchased prior to 2004 are manufactured by Freightliner LLC, a Daimler Chrysler
Company. In June, 2004 the Company began the replacement of their entire tractor
fleet with trucks manufactured by Navistar International Corporation. Most of
the Company's trailers are manufactured by Wabash National Corporation. The
Company's policy is to operate its tractors while under warranty to minimize
repair and maintenance cost and reduce service interruptions caused by
breakdowns. In addition, the Company's preventive maintenance program is
designed to minimize equipment downtime, facilitate customer service, and
enhance trade value when equipment is replaced. Factors considered when
purchasing new equipment include fuel economy, price, technology, warranty
terms, manufacturer support, driver comfort, and resale value. Owner-operator
tractors are inspected by the Company for compliance with operational and safety
requirements of the Company and the DOT. These tractors are periodically
inspected to monitor continued compliance.
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, 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.
Fuel
The Company purchases fuel through a network of approximately 46 fuel stops
throughout the United States at which the Company has negotiated price
discounts. Bulk fuel sites are maintained at all ten of the Company's terminal
locations in order to take advantage of volume pricing. Both aboveground and
underground storage tanks are utilized at the bulk fuel sites. Exposure to
environmental clean up costs is minimized by periodic inspection and monitoring
of the tanks.
Increases in fuel prices can have an adverse effect on the results of
operations. The Company has fuel surcharge agreements with most customers
enabling the pass through of long-term price increases. Fuel consumed by empty
and out-of-route miles and by truck engine idling time is not recoverable.
Competition
The truckload industry is highly competitive and includes thousands of
carriers, none of which dominates the market. The Company competes primarily
with other truckload carriers, and to a lesser extent with railroads, intermodal
service, less-than-truckload carriers, and private fleets operated by existing
and potential customers. Although intermodal and rail service has improved in
recent years, such service has not been a major factor in the Company's
short-to-medium haul traffic lanes (525-mile average length of haul).
Historically, competition has created downward pressure on the truckload
industry's pricing structure. Management believes that competition for the
freight targeted by the Company is based primarily upon service and efficiency
and to a lesser degree upon freight rates.
Regulation
The Company is a common and contract motor carrier regulated by the DOT.
The DOT generally governs matters such as safety requirements, registration to
engage in motor carrier operations, accounting systems, certain mergers,
consolidations, acquisitions, and periodic financial reporting. The Company
currently has a satisfactory DOT safety rating, which is the highest available
rating. A conditional or unsatisfactory DOT safety rating could have an adverse
effect on the Company, as some of the Company's contracts with customers require
a satisfactory rating. Such matters as weight and dimensions of equipment are
also subject to federal, state, and international regulations.
3
The DOT adopted revised hours-of-service regulations on April 28, 2003.
Compliance with the newly mandated regulations took effect on January 4, 2004.
As the Company has made concerted efforts to work with shippers and drivers to
minimize the impact of the revised hours-of-service regulations, they have had
minimal effect on our operations due to proper planning and customer
cooperation. 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 Federal Motor Carrier Safety
Administration (FMCSA) develops a new set of regulations, whichever comes first.
The 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.
We also may become subject to new or more restrictive regulations relating
to matters such as fuel emissions and ergonomics. Our company drivers and
independent contractors also must comply with the safety and fitness regulations
promulgated by the DOT, including those relating to drug and alcohol testing.
Additional changes in the laws and regulations governing our industry could
affect the economics of the industry by requiring changes in operating practices
or by influencing the demand for, and the costs of providing, services to
shippers.
The Company's operations are subject to various federal, state, and local
environmental laws and regulations, implemented principally by the EPA and
similar state regulatory agencies, governing the management of hazardous wastes,
other discharge of pollutants into the air and surface and underground waters,
and the disposal of certain substances. Management believes that its operations
are in material compliance with current laws and regulations and does not know
of any existing condition that would cause compliance with applicable
environmental regulations to have a material effect on the Company's capital
expenditures, earnings and competitive position. In the event the Company should
fail to comply with applicable regulations, the Company could be subject to
substantial fines or penalties and to civil or criminal liability.
Available Information
The Company files its Annual Report on Form 10-K, its Quarterly Reports on
Form 10-Q, Definitive Proxy Statements and periodic Current Reports on Form 8-K
with the Securities and Exchange Commission (SEC). The public may read and copy
any material filed by the Company with the SEC at the SEC's Public Reference
Room at 450 Fifth Street NW, Washington, DC 20549. The public may obtain
information from the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Definitive Proxy Statements, Current Reports on Form 8-K and other information
filed with the SEC are available to the public over the Internet at the SEC's
website at http://www.sec.gov and through a hyperlink on the Company's Internet
website, at http://www.heartlandexpress.com.
Forward-Looking Information
The forward-looking statements in this report, which reflect management's
best judgment based on factors currently known, involve risks and uncertainties.
Actual results could differ materially from those anticipated in the
forward-looking statements included herein as a result of a number of factors,
including, but not limited to, those discussed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 2. PROPERTIES
Heartland's headquarters is located adjacent to Interstate 80, near Iowa
City, Iowa. The facilities include five acres of land, two office buildings of
approximately 25,000 square feet combined and a storage building, all leased
from the Company's president and principal stockholder. Company-owned facilities
at this location include three tractor and trailer maintenance garages totaling
approximately 26,500 square feet, and a safety and service complex adjacent to
Heartland's corporate offices. The adjacent facility provides the Company with
six acres of additional trailer parking space, a drive-through inspection bay,
an automatic truck wash facility, and 6,000 square feet of office space and
driver facilities.
The Company owns regional facilities in Ft. Smith, Arkansas; O'Fallon,
Missouri; Atlanta, Georgia; Columbus, Ohio; Jacksonville, Florida; Kingsport,
Tennessee; Olive Branch, Mississippi; Chester, Virginia; and Carlisle,
Pennsylvania. A company-owned facility in Dubois, Pennsylvania is being leased
to an unrelated third party. A company-owned facility in Columbus, Ohio is
available for rent.
4
ITEM 3. LEGAL PROCEEDINGS
Additionally, the Company is a party to ordinary, routine litigation and
administrative proceedings incidental to its business. These proceedings
primarily involve claims for personal injury, property damage, and workers'
compensation 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2004, no matters were submitted to a vote of
security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's common stock has been traded on the NASDAQ National Market
under the symbol HTLD, since November 5, 1986, the date of the Company's initial
public offering. The following table sets forth for the calendar period
indicated the range of high and low price quotations for the Company's common
stock as reported by NASDAQ and the Company's dividends declared per common
share from January 1, 2003 to December 31, 2004. The prices and dividends
declared have been restated to reflect a three-for-two stock split on August 20,
2004.
Dividends Declared
Period High Low Per Common Share
Calendar Year 2004
1st Quarter $ 16.76 $ 14.08 $.013
2nd Quarter 18.33 14.79 .013
3rd Quarter 18.88 16.87 .020
4th Quarter 23.21 17.81 .020
Calendar Year 2003
1st Quarter $ 15.43 $ 11.36 $ -
2nd Quarter 16.28 12.65 -
3rd Quarter 17.95 14.83 .013
4th Quarter 17.73 15.55 .013
The prices reported reflect interdealer quotations without retail mark-ups,
markdowns or commissions, and may not represent actual transactions. As of
January 25, 2005 the Company had 242 stockholders of record of its common stock.
However, the Company estimates that it has a significantly greater number of
stockholders because a substantial number of the Company's shares are held of
record by brokers or dealers for their customers in street names.
Dividend Policy
During the third quarter of 2003 the Company announced the implementation
of a quarterly cash dividend program. The Company has declared and paid
quarterly dividends for the past six quarters, the last two quarters in 2003 and
the four for 2004. The Company does not currently intend to discontinue the
quarterly cash dividend program. However, future payments of cash dividends will
depend upon the financial condition, results of operations and capital
requirements of the Company, as well as other factors deemed relevant by the
Board of Directors.
5
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.
Stock Based Compensation
At December 31, 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 $380,427 and $364,851 for the twelve months
ended December 31, 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 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's consolidated financial statements and notes under Item 8 of this
Form 10-K.
Year Ended December 31,
(in thousands, except per share data)
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Income Statement Data:
Operating revenue $ 457,086 $ 405,116 $ 340,745 $ 294,617 $ 274,827
--------- --------- --------- --------- ---------
Operating expenses:
Salaries, wages, and benefits 157,505 141,293 109,960 87,643 73,847
Rent and purchased transportation 36,757 49,988 64,159 65,912 75,191
Operations and maintenance 96,202 75,516 56,335 47,903 42,651
Taxes and licenses 8,996 8,403 7,144 6,189 5,952
Insurance and claims 16,545 2,187 9,193 7,619 6,706
Communications and utilities 3,669 3,605 2,957 2,903 2,952
Depreciation 29,628 26,534 20,379 17,001 16,285
Other operating expenses 14,401 12,539 8,843 6,814 6,505
(Gain) loss on disposal of
fixed assets (175) (46) (274) 14 (1,512)
--------- --------- --------- --------- ---------
363,528 320,019 278,696 241,998 228,577
--------- --------- --------- --------- ---------
Operating income 93,558 85,097 62,049 52,619 46,250
Interest income 3,071 2,046 2,811 4,435 5,726
--------- --------- --------- --------- ---------
Income before income taxes 96,629 87,143 64,860 57,054 51,976
Income taxes 34,183 29,922 22,053 19,398 17,672
--------- --------- --------- --------- ---------
Net income $ 62,446 $ 57,221 $ 42,807 $ 37,656 $ 34,304
========= ========= ========= ========= =========
Basic weighted average shares
outstanding (1) 75,000 75,000 75,000 75,000 75,512
========= ========= ========= ========= =========
Basic earnings per share (1) $ .83 $ .76 $ 0.57 $ 0.50 $ 0.45
========= ========= ========= ========= =========
Balance sheet data:
Net working capital $ 242,472 $ 186,648 $ 146,297 $ 147,904 $ 118,506
Total assets 517,012 448,407 373,108 314,238 268,055
Stockholders' equity 389,343 331,516 275,930 232,789 195,134
(1) All periods have been adjusted to reflect the three-for-two stock split.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 2004, freight revenue,
excluding fuel surcharge, increased 9.9% to $428.6 million from $389.8 million
in 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 reliable
equipment and equipment availability. During 2004 the Company purchased $58.8
million in revenue equipment. These purchases were financed through cash
generated by operating activities, and the Company expects future revenue
equipment purchases to be financed using current cash and investment balances
and cash flow provided by future 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. 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 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 FMCSA will continue to enforce 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 by
$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. Effective the first quarter of 2005,
the Company will increase driver pay an additional $0.03 per mile. The 2004 and
the first quarter 2005 driver pay increases will increase driver pay
approximately 15% over the 2003 period. 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 qualified drivers; however, a long term shortage of drivers could hinder
growth.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods.
The Company's management routinely makes judgments and estimates about the
effect of matters that are inherently uncertain. As the number of variables and
assumptions affecting the probable future resolution of the uncertainties
increase, these judgments become even more subjective and complex. The Company
has identified certain accounting policies, described below, that are the most
important to the portrayal of the Company's current financial condition and
results of operations. The Company's significant accounting policies are
disclosed in Item 8. Note 1, "Significant Accounting Policies" of the Notes to
Consolidated Financial Statements.
The most significant accounting policies and estimates that affect the
financial statements include the following:
* Revenue is recognized when freight is delivered.
* Selections of estimated useful lives and salvage values for purposes of
depreciating tractors and trailers. Depreciable lives of tractors and
trailers are 5 and 7 years, respectively. Estimates of salvage value are
based upon the expected market values of equipment at the end of the
expected useful life.
* Management estimates accruals for the self-insured portion of pending
accident liability, workers' compensation, physical damage and cargo damage
claims. These accruals are based upon individual case estimates, including
reserve development, and estimates of incurred-but-not-reported losses
based upon past experience.
7
Management periodically re-evaluates these estimates as events and
circumstances change. These factors may significantly impact the Company's
results of operations from period-to-period.
Results of Operations
The following table sets forth the percentage relationship of income and
expense items to operating revenue for the years indicated.
Year Ended December 31,
----------------------------------------
2004 2003 2002
------- ------- -------
Operating revenue 100.0% 100.0% 100.0%
------- ------- -------
Operating expenses:
Salaries, wages, and benefits 34.4% 34.9% 32.3%
Rent and purchased transportation 8.0 12.4 18.8
Operations and maintenance 21.0 18.6 16.5
Taxes and licenses 2.0 2.1 2.1
Insurance and claims 3.6 0.5 2.7
Communications and utilities 0.8 0.9 0.9
Depreciation 6.5 6.5 6.0
Other operating expenses 3.2 3.1 2.6
(Gain) on disposal of fixed assets (0.0) (0.0) (0.1)
------- ------- -------
Total operating expenses 79.5% 79.0% 81.8%
------- ------- -------
Operating income 20.5% 21.0% 18.2%
Interest income 0.7 0.5 0.8
------- ------- -------
Income before income taxes 21.2% 21.5% 19.0%
Federal and state income taxes 7.5 7.4 6.4
------- ------- -------
Net income 13.7% 14.1% 12.6%
======= ======= =======
Year Ended December 31, 2004 Compared With Year Ended December 31, 2003
Operating revenue increased $52.0 million (12.8%), to $457.1 million in
2004 from $405.1 million in 2003, as a result of the Company's expansion of its
fleet and customer base as well as improved freight rates and fleet utilization.
Operating revenue for both periods was also positively impacted by fuel
surcharges assessed to the customer base. Fuel surcharge revenue increased $13.2
million to $28.5 million from $15.3 million reported in 2003.
Salaries, wages, and benefits increased $16.2 million (11.5%), to $157.5
million in 2004 from $141.3 million in 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.
The pay increase was consistent with the Company strategy to "promote retention
of quality drivers" as well as incent drivers to accept loads into the Northeast
corridor of the United States. During 2004, employee drivers accounted for 88%
and independent contractors 12% of the total fleet miles, compared with 82% and
18%, respectively, in 2003. Workers' compensation expense decreased $0.9 million
(10.9%) to $7.6 million in 2004 from $8.6 million in 2003. The 2003 period was
increased by a $2.9 million adjustment as a result of an actuarial review of
claims. Excluding the 2003 increase to claims reserves related to the actuarial
review, workers' compensation expense increased 35.2% during the year due to an
increase in the frequency and severity of claims.
Rent and purchased transportation decreased $13.2 million (26.5%), to $36.8
million in 2004 from $50.0 million in 2003. This reflected the Company's
decreased reliance upon independent contractors. Rent and purchased
transportation for both periods includes amounts paid to independent contractors
for fuel surcharge.
Operations and maintenance increased $20.7 million (27.4%) to $96.2 million
in 2004 from $75.5 million in 2003. The increase, primarily related to fuel
expense, is attributable to increased reliance on the Company owned fleet and
record high fuel prices. Fuel prices during 2004 were higher compared to 2003.
While the fuel surcharge has mitigated some of the increase in fuel costs, fuel
pricing remains the largest cost, outside of wages and benefits. Average fuel
cost per Company owned tractor mile increased 21.7% during 2004 compared to
2003.
8
Insurance and claims increased $14.4 million (656.3%), to $16.5 million in
2004 from $2.2 million in 2003. As a result of an actuarial review, management
decreased the amount accrued for accident liability claims by $11.2 million
during the fourth quarter of 2003. Excluding the 2003 decrease to claims
reserves related to the actuarial review, insurance and claims expense increased
23.8% during the year due to increased frequency and severity of claims
incurred. Insurance and claims expense will vary 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 is responsible for the first
$1.0 million on each accident claim and also for up to $2.0 million in the
aggregate for all accident claims above $1.0 million and below $2.0 million for
the policy year ended March 31, 2005.
Depreciation increased $3.1 million (11.7%), to $29.6 million in 2004 from
$26.5 million in 2003. The increase is due to an increase in the number of
Company-owned tractors, the replacement of older tractor units with new tractor
units, the growth of the trailer fleet, a change in salvage value assigned to
trailers, and a change to tractor depreciation methodology. 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
approximately $0.6 million during 2004. Effective June 1, 2004, the Company
began depreciating new tractors by applying the 125% declining balance to the
book cost of the tractor. Previously, the 125% declining balance method was
applied to book cost, net of salvage. This change in method increased
depreciation by approximately $1.2 million during the year ended December 31,
2004.
Other operating expenses increased $1.9 million (14.9%), to $14.4 million
in 2004 from $12.5 million in 2003. Other operating expenses consist of costs
incurred for advertising expense, freight handling, highway tolls, driver
recruiting expenses, and administrative costs. During 2004, advertising expense
relating to driver recruiting increased $0.3 million compared to 2003 while
freight handling and highway tolls increased $1.4 million and $0.2 million
respectively.
The Company's effective tax rate was 35.4% and 34.3% in 2004 and 2003,
respectively. Income taxes have been provided for 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.
Adjustments in the fourth quarter of 2003 to self-insurance reserves for
workers' compensation and accident liability resulted in an increase in
operating income, net income and earnings per share of $8.3 million, $5.4
million and $0.07, respectively, for the year ended December 31, 2003. The
Company's net income for 2004 increased 20.4% excluding the 2003 adjustment
related to the actuarial reviews.
Year Ended December 31, 2003 Compared With Year Ended December 31, 2002
Operating revenue increased $64.4 million (18.9%), to $405.1 million in
2003 from $340.7 million in 2002, as a result of the Company's expansion of the
customer base as well as increased volume from existing customers. The June 2002
acquisition of the trucking assets of Great Coastal Express, Inc. contributed
approximately $13.2 million to the increase in revenue for 2003. Operating
revenue for both periods was also positively impacted by fuel surcharges
assessed to the customer base. Fuel surcharge revenue increased $9.4 million to
$15.3 million from $5.9 million reported in 2002.
Salaries, wages, and benefits increased $31.4 million (28.5%), to $141.3
million in 2003 from $109.9 million in 2002. This increase is the result of
increased reliance on employee drivers and a corresponding decrease in miles
driven by independent contractors. The increase in employee driver miles was
attributable to internal growth in the company tractor fleet and the acquisition
of Great Coastal Express. During 2003, employee drivers accounted for 82% and
independent contractors 18% of the total fleet miles, compared with 73% and 27%,
respectively, in 2002. During the fourth quarter of 2003, the Company engaged
consulting actuaries to assist in determining the liability for self insurance
reserves for workers' compensation claims. As a result of the actuarial studies
management increased the amount accrued for workers' compensation claims by $2.9
million.
Rent and purchased transportation decreased $14.1 million (22.1%), to $50.0
million in 2003 from $64.1 million in 2002. This reflected the Company's
decreased reliance upon independent contractors. Rent and purchased
transportation for both periods includes amounts paid to independent contractors
for fuel surcharge.
9
Operations and maintenance increased $19.2 million (34.0%), to $75.5
million in 2003 from $56.3 million in 2002. The increase, primarily related to
fuel expense, is attributable to increased reliance on the Company owned fleet.
Average fuel costs per Company owned tractor mile increased 13.7% during 2003
compared to 2002.
Insurance and claims decreased $7.0 million (76.2%), to $2.2 million in
2003 from $9.2 million in 2002. Insurance and claims expense will vary 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
increased its accident liability self-insurance retention level to $1.0 million
from $0.5 million for claims incurred after April 1, 2003. In addition, the
Company is now responsible for up to $2.0 million in aggregate for claims above
$1.0 million and below $2.0 million for the policy year ended March 31, 2004.
Due to the increased exposure, the Company engaged consulting actuaries to
assist in determining the liability for self insurance reserves for accident
liability claims. As a result of the actuarial studies management decreased the
amount accrued for accident liability claims by $11.2 million during the fourth
quarter of 2003.
Depreciation increased $6.1 million (30.2%), to $26.5 million in 2003 from
$20.4 million in 2002. The increase is due to an increase in the number of
Company-owned tractors, the growth of the trailer fleet and a change in salvage
value on Company owned trailers during 2003. Effective April 1, 2003, the
Company decreased the salvage value on trailers to $4,000 from $6,000. The
reduction of salvage value increased depreciation expense approximately $1.7
million during 2003.
Other operating expenses increased $3.7 million (41.8%), to $12.5 million
in 2003 from $8.8 million in 2002 due to an increase in total fleet miles. Other
operating expenses consist of costs incurred for freight handling, highway
tolls, driver recruiting expenses, and administrative costs. During 2003,
advertising expense relating to driver recruiting increased $1.3 million
compared to 2002.
The Company's effective tax rate was 34.3% and 34.0% in 2003 and 2002,
respectively.
Adjustments in the fourth quarter of 2003 to self-insurance reserves for
workers' compensation and accident liability resulted in operating income, net
income and earnings per share of $8.3 million, $5.4 million and $0.07,
respectively. Net income for 2003 increased 21.1% excluding the adjustments
related to the actuarial reviews.
Liquidity and Capital Resources
The growth of the Company's business requires 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 year ended December 31, 2004, was
net cash provided by operating activities of $103.5 million compared to $97.1
million in the corresponding 2003 period.
Capital expenditures for property and equipment, net of trade-ins, totaled
$43.9 million for the year during 2004 compared to $47.1 million during 2003.
Capital expenditures for revenue equipment, net of trades, are expected to be
approximately $45.8 million in 2005.
The Company paid cash dividends of $4.5 million in 2004 compared to $1.0
million in 2003. The Company began paying cash dividends in the third quarter of
2003.
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 which are expected to be funded by cash flow
provided by operations and from existing cash, cash equivalents, and
investments. The Company ended the year with $258.3 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 drivers,
fluctuations in the resale value of revenue equipment, economic and customer
business cycles and shipping demands are economic factors over which the Company
10
has little or no control. 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.
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. 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 operating taxes to customers in the form of surcharges and
higher rates, shorter-term increases are not fully recovered.
Fuel prices have remained high throughout most of 2002, 2003, and 2004,
thus increasing our cost of operations. In addition to the increased fuel costs,
the reduced fuel efficiency of the new engines will put additional pressure on
profitability due to increased fuel consumption. 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.
Contractual Obligations and Commercial Commitments
The following sets forth our contractual obligations and commercial
commitments at December 31, 2004. As of December 31, 2004 the Company has no
debt outstanding.
Commitments Expiration by
Period
----------------------------------------------
Total Less than 1 year 1 - 3 years
Purchase Obligations (1) $ 92,675,000 $ 45,796,000 $ 46,879,000
Operating Lease Obligations (2) $ 124,844 $ 124,844 $ -
Standby letters of credit (3) $ 4,560,000 $ 4,560,000 $ -
----------------------------------------------
Total $ 97,359,844 $ 50,480,844 $ 46,879,000
==============================================
(1) The purchase obligations reflect the total purchase price, net of trade-in
values, for tractors scheduled for delivery through December 2006. These
purchases are expected to be financed by existing cash and investment balances,
and with cash flows from operations.
(2) The operating lease obligation is for the Company's corporate offices and
expires May 31, 2005. The lease contains a five-year renewal option.
(3) The standby letters of credit are primarily required for self-insurance
purposes and there are no balances outstanding on the letters of credit.
The Company has no contractual obligations extending beyond December 31, 2006.
11
Forward-Looking Statements and Risk Factors
Statements in this report that are not reported financial results or other
historical information are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements are based
on present information the Company has related to its existing business
circumstances and involve a number of business risks and uncertainties, any of
which could cause actual results to differ materially from such forward-looking
statements. Further, investors are cautioned that the Company does not assume
any obligation to update forward-looking statements based on unanticipated
events or changed expectations. In addition to specific factors that may be
described in connection with any particular forward-looking statement, the
following factors could cause actual results to differ materially.
Growth with existing customers and the ability to solicit new business is
dependent upon the Company's ability to provide on-time service and certain
economic factors. Weakness in the economy, including decreased consumer demand,
could adversely affect the demand for the Company's transportation services and
future growth. The ability to negotiate increased freight rates to offset
effects of inflation and cost increases is also dependent upon the state of the
economy to a certain extent. The Company may also be affected by the financial
failure of existing customers resulting in fewer shipments or potential bad debt
write-offs. An extended period of economic downturn could also enhance revenue
growth because of industry consolidation. The truckload industry is highly
competitive with an abundance of trucking companies, both profitable and
marginal. The business failures of the marginal competition may result in
increased opportunities for the financially strong.
The Company generates a significant amount of its revenues from a few major
customers. For the year ended December 31, 2004, the Company's top 25 customers
accounted for 59% of its revenue. A reduction or a termination of business with
a major customer could have a material adverse effect on financial results.
The availability and cost of petroleum are affected by worldwide political,
economic, and market factors that are beyond our control. Shortages of fuel and
the resulting increase in the price of diesel can have an adverse impact on
operations and profitability. The Company's operating results are negatively
impacted to the extent that high fuel costs cannot be recovered through customer
fuel surcharge agreements.
The Company is subject to regulation by the DOT, EPA, and various other
federal and state authorities. New or more comprehensive regulations pertaining
to fuel emissions, driver hours-of-service, or other mandated regulation could
result in increased cost of operations. In addition, increased taxes and
operating fees mandated by federal and state taxing authorities can have an
adverse effect on profitability.
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.
The Company's operation is highly dependent on the hiring and retention of
experienced drivers with safe driving records. There has been a shortage of
qualified drivers and independent contractors over the past several years. The
availability of independent contractors has declined due to high fuel prices and
the decreased availability of tractor financing. The Company expects that the
hiring of qualified drivers will remain competitive. A shortage of qualified
drivers and independent contractors for an extended period of time could effect
the growth and operating results of the Company. The Company increased driver
compensation the first quarter of 2004 and is implementing a comparable increase
in the first quarter of 2005. In the fourth quarter of 2004 the Company
increased driver pay for miles driven in the upper Northeastern United States.
Increases in driver compensation could adversely affect our earnings if not
offset by corresponding increases in freight rates.
The Company is a party to ordinary, routine litigation and administrative
proceedings incidental to its business. These proceedings primarily involve
claims for personal injury, property damage, and workers' compensation 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. Claims in excess of these
retentions are covered by premium-based policies to levels that management
considers adequate. In recent years the cost of insurance in the industry has
increased dramatically due to increased claims and economic conditions.
12
The Company's current insurance policies expire in 2005. Increases in premiums
and self-retention levels could impact the results of operations.
New Accounting Pronouncements
See Note 1 of the Consolidated Financial Statements for a full description
of recent accounting pronouncements and the respective expected dates of
adoption and effects on results of operations and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company purchases only high quality liquid investments. Primarily all
investments as of December 31, 2004 have an original maturity or interest reset
date of six 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 December 31, 2004 and therefore,
has no market risk related to debt.
As of December 31, 2004, the Company has no derivative financial
instruments to reduce its exposure to diesel fuel price fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and
Stockholders of Heartland Express, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting appearing under
Item 9A, that Heartland Express, Inc. (a Nevada corporation) and subsidiaries
(the Company) maintained effective internal control over financial reporting as
of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed 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. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
13
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Heartland Express, Inc. and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also,
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Heartland Express, Inc. and subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2004, and our report dated February 9, 2005, expressed an unqualified opinion on
those consolidated financial statements.
Des Moines, Iowa
February 9, 2005
14
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Heartland Express, Inc.:
We have audited the accompanying consolidated balance sheets of Heartland
Express, Inc. (a Nevada corporation) and subsidiaries (the Company) as of
December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2004. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
Schedule II. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Heartland Express,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of its
operations and its cash flows of each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement Schedule II
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 9, 2005, expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
KPMG LLP
Des Moines, Iowa
February 9, 2005
15
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2004 2003
CURRENT ASSETS
Cash and cash equivalents ................. $ 1,610,543 $ 38,618,430
Investments ............................... 256,727,782 163,812,725
Trade receivables, net of allowance
for doubtful accounts of $775,000 and
$675,000, respectively ................... 37,102,813 36,836,728
Prepaid tires and tubes ................... 2,692,090 2,529,580
Deferred income taxes ..................... 24,964,000 21,308,000
Other current assets ...................... 158,267 673,101
------------- -------------
Total current assets ................... 323,255,495 263,778,564
------------- -------------
PROPERTY AND EQUIPMENT
Land and land improvements ................ 9,543,953 6,912,819
Buildings ................................. 17,494,255 19,777,586
Furniture and fixtures .................... 1,210,424 1,210,424
Shop and service equipment ................ 2,557,654 2,043,356
Revenue equipment ......................... 222,842,499 202,706,807
------------- -------------
253,648,785 232,650,992
Less accumulated depreciation ............. 68,973,751 56,951,186
------------- -------------
Property and equipment, net ............... 184,675,034 175,699,806
------------- -------------
GOODWILL ..................................... 4,814,597 4,814,597
OTHER ASSETS ................................. 4,266,725 4,113,589
------------- -------------
$ 517,011,851 $ 448,406,556
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities .. $ 9,722,099 $ 15,684,826
Compensation and benefits ................. 11,151,523 10,704,329
Income taxes payable ...................... 7,918,914 7,720,875
Insurance accruals ........................ 45,995,442 37,125,109
Other accruals ............................ 5,995,943 5,895,502
------------- -------------
Total current liabilities ............... 80,783,921 77,130,641
------------- -------------
DEFERRED INCOME TAXES ........................ 46,885,000 39,760,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01;
authorized 5,000,000 shares;
none issued ............................. -- --
Common stock, par value $.01; 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 ....................... 380,906,884 323,710,296
------------- -------------
390,167,189 332,720,601
Less unearned compensation .............. (824,259) (1,204,686)
------------- -------------
389,342,930 331,515,915
------------- -------------
$ 517,011,851 $ 448,406,556
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
16
16
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Operating revenue ....................... $ 457,086,311 $ 405,116,097 $ 340,745,026
------------- ------------- -------------
Operating expenses:
Salaries, wages, and benefits ........ 157,505,082 141,292,791 109,959,772
Rent and purchased transportation .... 36,757,494 49,988,074 64,159,365
Operations and maintenance ........... 96,202,224 75,516,232 56,334,769
Taxes and licenses ................... 8,996,380 8,402,986 7,144,078
Insurance and claims ................. 16,544,050 2,187,537 9,192,632
Communications and utilities ......... 3,668,494 3,604,661 2,956,810
Depreciation ......................... 29,628,157 26,533,937 20,378,720
Other operating expenses ............. 14,401,075 12,538,652 8,843,137
Gain on disposal of fixed assets ..... (174,831) (45,782) (273,549)
------------- ------------- -------------
363,528,125 320,019,088 278,695,734
------------- ------------- -------------
Operating income ..................... 93,558,186 85,097,009 62,049,292
Interest income ......................... 3,070,956 2,045,793 2,811,181
------------- ------------- -------------
Income before income taxes ........... 96,629,142 87,142,802 64,860,473
Income taxes ............................ 34,182,554 29,921,477 22,052,559
------------- ------------- -------------
Net income ........................... $ 62,446,588 $ 57,221,325 $ 42,807,914
============= ============= =============
Basic earnings per share ................ $ 0.83 $ 0.76 $ 0.57
============= ============= =============
Basic weighted average shares outstanding 75,000,000 75,000,000 75,000,000
============= ============= =============
Dividends declared per share ............ $ 0.067 $ 0.027 $ --
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
17
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital Additional Unearned
Stock, Paid-In Retained Compen-
Common Capital Earnings sation Total
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2001 ................ $ 500,000 $ 6,608,170 $ 225,681,057 $ -- $ 232,789,227
Net income ................................ -- -- 42,807,914 -- 42,807,914
Transfer pursuant to stock awards (Note 6) -- 1,995,592 -- (1,995,592) --
Amortization of unearned compensation ..... -- -- -- 332,598 332,598
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2002 ................ 500,000 8,603,762 268,488,971 (1,662,994) 275,929,739
Net income ................................ -- -- 57,221,325 -- 57,221,325
Dividends on common stock, $0.027 per share -- -- (2,000,000) -- (2,000,000)
Forfeiture of stock awards (Note 6) ....... -- (93,457) -- 93,457 --
Amortization of unearned compensation ..... -- -- -- 364,851 364,851
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2003 ................ 500,000 8,510,305 323,710,296 (1,204,686) 331,515,915
Net income ................................ 62,446,588 62,446,588
Dividends on common stock, $0.067 per share -- -- (5,000,000) -- (5,000,000)
Stock split (Note 6) ...................... 250,000 -- (250,000) -- --
Amortization of unearned compensation ..... -- -- -- 380,427 380,427
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004 ................ $ 750,000 $ 8,510,305 $ 380,906,884 $ (824,259) $ 389,342,930
============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements. 18
18
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------------
2004 2003 2002
------------- ------------- -------------
OPERATING ACTIVITIES
Net income ..................................................... $ 62,446,588 $ 57,221,325 $ 42,807,914
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization ............................... 29,648,161 26,553,933 20,390,389
Deferred income taxes ....................................... 3,469,000 9,497,000 5,317,000
Amortization of unearned compensation ....................... 380,427 364,851 332,598
Gain on disposal of fixed assets ............................ (174,831) (45,782) (273,549)
Changes in certain working capital items:
Trade receivables ......................................... (266,085) (3,824,334) (7,311,959)
Other current assets ...................................... 514,834 2,228,270 (678,174)
Prepaids .................................................. (328,830) (52,757) (475,454)
Accounts payable, accrued liabilities,
and accrued expenses....................................... 7,631,300 3,491,247 8,399,063
Accrued income taxes ...................................... 198,039 1,650,557 (623,080)
------------- ------------- -------------
Net cash provided by operating activities ...................... 103,518,603 97,084,310 67,884,748
------------- ------------- -------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment ................... 956,731 173,624 10,159,471
Additions to property and equipment ............................ (43,899,131) (47,062,344) (58,469,994)
Acquisition of business ........................................ -- -- (26,719,495)
Net (purchases) sales of municipal bonds ....................... (92,915,057) (24,758,061) 16,446,425
Other .......................................................... (173,140) (627,597) (69,430)
------------- ------------- -------------
Net cash used in investing activities .......................... (136,030,597) (72,274,378) (58,653,023)
------------- ------------- -------------
FINANCING ACTIVITIES, cash dividend ............................ (4,495,893) (998,260) --
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ........... (37,007,887) 23,811,672 9,231,725
CASH AND CASH EQUIVALENTS
Beginning of year .............................................. 38,618,430 14,806,758 5,575,033
------------- ------------- -------------
End of year .................................................... $ 1,610,543 $ 38,618,430 $ 14,806,758
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes ................................................ $ 30,515,515 $ 18,773,920 $ 17,358,639
Noncash investing activities:
Book value of revenue equipment traded ...................... $ 20,379,184 $ 2,338,332 $ 25,770,052
The accompanying notes are an integral part of these consolidated financial
statements.
19
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Business:
Heartland Express, Inc., (the "Company") is a short-to-medium-haul,
truckload carrier of general commodities. The Company provides nationwide
transportation service to major shippers, using late-model equipment and a
combined fleet of company-owned and owner-operator tractors. The Company's
primary traffic lanes are between customer locations east of the Rocky
Mountains, with selected service to the West. The Company operates the business
as one reportable segment.
Principles of Consolidation:
The accompanying consolidated financial statements include the parent
company, Heartland Express, Inc., and its subsidiaries, all of which are wholly
owned. All material intercompany items and transactions have been eliminated in
consolidation.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents:
Cash equivalents are short-term, highly liquid investments with
insignificant interest rate risk and original maturities of three months or
less. The Company previously reported municipal bonds with a reset provision of
three months or less as a cash equivalent. 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. Restricted and designated
cash and investments totaling $4.2 million in 2004 and $4.0 million in 2003 are
classified as other assets. The restricted funds represent those required for
self-insurance purpose and designated funds that are earmarked for a specific
purpose not for general business use.
Investments:
The Company investments are primarily in the form of tax free municipal
bonds with interest reset provisions or short-term municipal bonds. The
investments typically have a put option of 28 or 35 days. At the reset date the
Company has the option to roll the investment over or sell. The Company receives
the par value of the investment on the reset date if sold. During the year ended
December 31, 2003 the Company chose to reclassify these securities from
held-to-maturity to available-for-sale to provide more flexibility. Due to the
nature of the investments, the cost at December 31, 2004 and 2003 approximates
fair value; therefore, accumulated other comprehensive income (loss) has not
been recognized as a separate component of stockholders' equity. Investment
income received is generally exempt from federal income taxes.
Revenue and Expense Recognition:
Revenue, drivers' wages and other direct operating expenses are recognized
when freight is delivered.
20
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Trade Receivables and Allowance for Doubtful Accounts:
Revenue is recognized when freight is delivered creating a credit sale and
an accounts receivable. Credit terms for customer accounts are typically on a
net 30 basis. The Company uses a percentage of aged receivable method in
determining the allowance for bad debts. The Company reviews the adequacy of its
allowance for doubtful accounts on a monthly basis. The Company is aggressive in
its collection efforts resulting in a low number of write-offs annually.
Conditions that would lead an account to be considered uncollectible include;
customers filing bankruptcy and the exhaustion of all practical collection
efforts. The company will use the necessary legal recourse to recover as much of
the write-off as is practical under the law.
Property, Equipment, and Depreciation:
Property and equipment are stated at cost, while maintenance and repairs
are charged to operations as incurred. If equipment is traded rather than sold
and the cash paid in the trade represents less than 25% of the fair market value
of the equipment acquired, the cost of the new equipment is recorded at an
amount equal to the lower of the monetary consideration paid plus the net book
value of the traded equipment or the fair value of the new equipment.
Advertising Costs:
The Company expenses all advertising costs as incurred. Advertising costs
are included in other operating expenses in the Consolidated Statements of
Operations.
Depreciation Expense:
Depreciation for financial statement purposes is computed by the
straight-line method for all assets other than tractors, which are depreciated
by the 125% declining balance method applied to cost, net of salvage value.
Effective June 1, 2004 the Company changed this method prospectively. The 125%
declining balance is applied to the historic cost of the tractor and depreciated
down to the salvage value. This change in method increased depreciation by
approximately $1.2 million during the year ended December 31, 2004. The net
result is the same with the Company realizing increased depreciation in the
early years of the asset. For revenue equipment purchased after January 1, 2000,
trailers are depreciated using a $6,000 salvage value and the tractors using a
$15,000 salvage value. During 2003, the Company decreased the salvage value of
all trailers to $4,000 from $6,000. The Company based its decision on changes in
the estimated market values of trailers at the end of the expected useful life.
This change in accounting estimate resulted in an increase in depreciation
expense of approximately $1,728,000 during the year ended December 31, 2003.
Lives of the assets are as follows:
Years
Land improvements and building 3-30
Furniture and fixtures 2-3
Shop and service equipment 3-5
Revenue equipment 5-7
Tires and Tubes:
The cost of tires and tubes on new revenue equipment is carried as a
prepayment and amortized over the estimated tire life of two years. Replacement
tires (including recapped tires) are expensed when purchased.
21
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill:
The Company adopted Statement of Financial Accounting Standards No. 142,
"Accounting for Goodwill and Other Intangible Assets" (SFAS No. 142), on January
1, 2002. SFAS No. 142 requires that goodwill be tested at least annually for
impairment by applying a fair value based analysis. With the adoption of SFAS
No. 142, goodwill is no longer subject to amortization. Prior to 2002, goodwill
was amortized on a straight-line basis over a five year period. Management
determined that no impairment charge was required for the years ended December
31, 2004, 2003, and 2002.
Earnings Per Share:
Basic earnings per share are based upon the weighted average common shares
outstanding during each year. Diluted earnings per share are based upon the
weighted average common and common equivalent shares outstanding during each
year. Heartland Express has no common stock equivalents; therefore, diluted
earnings per share are equal to basic earnings per share. All earnings per share
data presented have been restated to reflect a three-for-two stock split on
August 20, 2004.
Insurance and Claims accruals:
Insurance accruals reflect the estimated cost for cargo loss and damage,
bodily injury and property damage (BI/PD), and workers' compensation claims,
including estimated loss development and loss adjustment expenses, not covered
by insurance. The cost of cargo and BI/PD insurance and claims are included in
insurance and claims expense, while the costs of workers' compensation insurance
and claims are included in salaries, wages, and benefits in the Consolidated
Statements of Operations.
Impairment of Long-Lived Assets:
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS No. 144). The Company periodically evaluates property and
equipment for impairment upon the occurrence of events or changes in
circumstances that indicate the carrying amount of asset may not be recoverable.
There were no impairment charges recognized during the years ended December 31,
2004, 2003, and 2002.
Income Taxes:
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
New Accounting Pronouncements:
In January 2003, FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" which addresses the consolidation and disclosures of
these entities by business enterprises. As the Company does not have
22
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
any interest in such types of entities the adoption of this Interpretation did
not have a material impact upon its Consolidated Financial Statements.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," a
revision of SFAS No. 123, which addresses the accounting for share-based payment
transactions. SFAS No. 123(R) eliminates the ability to account for employee
share-based compensation transactions using APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and generally requires instead that such
transactions be accounted and recognized in the statement of operations based on
their fair value. The Company does not anticipate that SFAS No. 123(R) will have
an impact on the Company.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets-An Amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair value
measurement for non-monetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, "Accounting for Non-monetary
Transactions," and replaces it with an exception for exchanges that do not have
commercial substance. SFAS 153 specifies that a non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is effective for the
fiscal periods beginning after June 15, 2005. The Company is currently
evaluating the effect that the adoption of SFAS 153 will have on its
consolidated results of operations and financial condition and has not
determined the financial impact.
Reclassifications:
Certain reclassifications have been made to prior year financial statements
to conform to the December 31, 2004 presentation.
Note 2. Concentrations of Credit Risk and Major Customers
The Company's major customers represent the consumer goods, appliances,
food products and automotive industries. Credit is usually granted to customers
on an unsecured basis. The Company's five largest customers accounted for 33%,
33%, and 37% of revenues for the years ended December 31, 2004, 2003, and 2002,
respectively. Operating revenue from one customer exceeded 10% of total gross
revenues in 2004, 2003, and 2002. Annual revenues for this customer were $62.7
million, $53.3 million, and $46.3 million for the years ended December 31, 2004,
2003, and 2002, respectively.
Notes 3. Income Taxes
Deferred income taxes are determined based upon the differences between the
financial reporting and tax basis of the Company's assets and liabilities.
Deferred taxes are provided at the enacted tax rates to be in effect when the
differences reverse.
23
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and liabilities as of December 31 are as follows:
2004 2003
------------ ------------
Deferred income tax liabilities,
related to property and equipment $ 46,885,000 $ 39,760,000
============ ============
Deferred income tax assets:
Allowance for doubtful accounts $ 306,000 $ 267,000
Accrued expenses 5,872,000 5,303,000
Insurance accruals 17,359,000 14,701,000
Other 1,427,000 1,037,000
------------ ------------
Deferred income tax assets $ 24,964,000 $ 21,308,000
============ ============
The income tax provision is as follows:
2004 2003 2002
------------ ------------ ------------
Current income taxes:
Federal $ 27,905,357 $ 18,853,846 $ 15,372,814
State 2,808,197 1,570,631 1,362,745
------------ ------------ ------------
30,713,554 20,424,477 16,735,559
------------ ------------ ------------
Deferred income taxes:
Federal 4,180,401 9,403,000 5,684,000
State (711,401) 94,000 (367,000)
------------ ------------ ------------
3,469,000 9,497,000 5,317,000
------------ ------------ ------------
Total $ 34,182,554 $ 29,921,477 $ 22,052,559
============ ============ ============
The income tax provision differs from the amount determined by applying the
U.S. federal tax rate as follows:
2004 2003 2002
------------ ------------ ------------
Federal tax at statutory rate (35%) $ 33,820,200 $ 30,499,981 $ 22,701,166
State taxes, net of federal benefit 1,375,000 1,122,000 807,000
Non-taxable interest income (1,045,000) (675,000) (907,000)
Other 32,354 (1,025,504) (548,607)
------------ ------------ ------------
$ 34,182,554 $ 29,921,477 $ 22,052,559
============ ============ ============
Note 4. Related Party Transactions
The Company leases two office buildings and a storage building from its
president under a lease which provides for monthly rentals of $24,969 plus the
payment of all property taxes, insurance and maintenance. The lease expires May
31, 2005 and contains a five-year renewal option. The Company is expected to
exercise the renewal option on the lease. In the opinion of management, the
rates paid are comparable to those that could be negotiated with a third party.
The total minimum rental commitment under the building lease is $124,844 for
2005. Rent expense paid to the Company's president totaled $299,625 for the
years ended December 31, 2004, 2003, and 2002.
24
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2003, the Company purchased 8.9 acres of
land at its headquarters from the Company's president for $1,350,000. The
property was appraised by a third party, and the transaction was approved by the
Board of Directors.
Note 5. Accident and Workers' Compensation Claims
The Company acts as a self-insurer for liability up to $1,000,000 for any
single occurrence involving cargo, personal injury or property damage. The
Company increased the retention amount from $500,000 to $1,000,000 for each
claim effective April 1, 2003. In addition, the Company is responsible for up to
$2,000,000 in aggregate for all claims above $1,000,000 and below $2,000,000 for
the policy year ended March 31, 2005. Liabilities in excess of these amounts are
assumed by an insurance company. For individual claims that exceed $50,000,000,
the company assumes the liability in excess of $50,000,000.
The Company acts as a self-insurer for workers' compensation liability up
to a maximum liability of $500,000 per claim. Beginning April 1, 2004, the
Company also is responsible for the first $500,000 in the aggregate above the
$500,000 per claim maximum liability. Liability in excess of this amount is
assumed by an insurance company. The State of Iowa has required the Company to
deposit $700,000 into a trust fund as part of the self-insurance program. This
deposit has been classified in other assets on the Consolidated Balance Sheet.
In addition, the Company has provided its insurance carriers with letters of
credit of approximately $4,600,000 in connection with its liability and workers'
compensation insurance arrangements.
Accident and workers' compensation accruals include the estimated
settlements, settlement expenses and an estimate for claims incurred but not yet
reported for property damage, personal injury and public liability losses from
vehicle accidents and cargo losses as well as workers' compensation claims for
amounts not covered by insurance.
Claims are based upon individual case estimates, including reserve
development, and estimates of incurred-but-not-reported losses based upon past
experience. Since the reported liability is an estimate, the ultimate liability
may be more or less than reported. If adjustments to previously established
accruals are required, such amounts are included in operating expenses. During
the fourth quarter of 2003, the Company engaged consulting actuaries to assist
in determining the liability for self insurance reserves for accident liability
and workers' compensation claims. As a result of the actuarial studies
management decreased the amount accrued for accident liability claims by $11.2
million and increased the amount accrued for workers' compensation claims by
$2.9 million. These adjustments resulted in an increase in operating income, net
income and earnings per share of $8.3 million, $5.4 million and $0.07,
respectively, during the year ended December 31, 2003.
Note 6. Stockholders' Equity
On January 28, 2002 the Company's Board of Directors approved a two and
seven tenths for one and seven tenths split of the Company's common stock effect
in the form of a 57.7% stock dividend for stockholders of record as of February
8, 2002. A total of 18,291,869 common shares were issued in this transaction. 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. A total of
25,000,000 common shares were issued in this transaction. The effect of the
stock dividends have been recognized retroactively in the shareholders' equity
accounts on the balance sheet as of December 31, 2004 and 2003, and in all the
per share data in the accompanying consolidated financial statements, notes to
financial statements and supplemental data.
In September, 2001, the Board of Directors of the Company authorized a
program to repurchase five million shares of the Company's Common Stock in open
market or negotiated transactions using available cash and cash equivalents. No
shares were purchased during 2004, 2003, and 2002. The authorization to
repurchase remains open at December 31, 2004 and has no expiration date.
25
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 7, 2002, the principal stockholder awarded 136,125 shares of his
common stock to key employees of the Company. These shares had a fair market
value of $14.66 per share on the date of the award. The shares will vest over a
five-year period subject to restrictions on transferability and to forfeiture in
the event of termination of employment. Any forfeited shares will be returned to
the principal stockholder. The fair market value of these shares, $1,995,592 on
the date of the award, was treated as a contribution of capital and is being
amortized on a straight-line basis over the five year vesting period as
compensation expense. During the year ended December 31, 2003, there were 6,375
shares forfeited. There were no shares forfeited in 2004. The original value of
the forfeited shares was treated as a reduction of Additional Paid in Capital
and Unearned Compensation. Compensation expense of approximately $380,000,
$365,000 and $333,000 was recognized for the years ended December 31, 2004,
2003, and 2002, respectively.
Note 7. Profit Sharing Plan and Retirement Plan
The Company has a retirement savings plan (the "Plan") for substantially
all employees who have completed one year of service and are 19 years of age or
older. Employees may make 401(k) contributions subject to Internal Revenue Code
limitations. The Plan provides for a discretionary profit sharing contribution
to non-driver employees and a matching contribution of a discretionary
percentage to driver employees. Company contributions totaled approximately
$1,089,000, $824,000, and $648,000, for the years ended December 31, 2004, 2003,
and 2002, respectively.
Note 8. Acquisition of Business
On June 1, 2002, the Company acquired the business and trucking assets of
Great Coastal Express, Inc. ("Great Coastal"), a privately-held truckload
carrier. Great Coastal had gross revenues of approximately $70 million in 2001.
The acquired assets (primarily revenue equipment) were recorded at their
estimated fair values of approximately $22.2 million in accordance with SFAS No.
141, Business Combinations. Goodwill in the amount of $4.4 million has been
recorded for the amount which the purchase price exceeded the fair value of the
assets acquired and is primarily attributable to the driver workforce acquired
as part of the acquisition. The acquisition has been accounted for in the
Company's results of operations since the acquisition date. The pro forma effect
of the acquisition on the Company's results of operations is immaterial. The
acquisition was funded from cash and investments.
Note 9. Commitments and Contingencies
On January 7, 2002, the Owner-Operators Independent Drivers Association,
Inc. served a lawsuit against the Company in the United States District Court
for the Southern District of Iowa. The lawsuit alleges that the Company failed
to adequately inform the owner-operators of certain deductions from their
settlement statements in violation of Department of Transportation regulations
and that the Company's standard contract with owner-operators violates those
regulations. The lawsuit sought unspecified damages and an injunction to prevent
owner-operators from hauling for the Company until alleged contractual
deficiencies are corrected. In December 2003, Heartland Express made an "offer
of judgment" in which to pay plaintiffs and class members $250,000 plus
reasonable attorneys' fees to resolve all claims in the case. The offer was
accepted by OOIDA, and the parties have jointly asked the court to approve the
offer and acceptance of judgment. Management's estimate of the total loss has
been accrued as of December 31, 2004.
The Company is a party to ordinary, routine litigation and administrative
proceedings incidental to its business. 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. In the opinion of management, the Company's potential
exposure under pending legal proceedings is adequately provided for in the
accompanying financial statements.
26
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Quarterly Financial Information (Unaudited)
First Second Third Fourth
-------- -------- -------- --------
(In Thousands, Except Per Share Data)
Year ended December 31, 2004
Operating revenue ........... $106,836 $113,512 $117,299 $119,439
Operating income ............ 19,776 23,501 25,660 24,621
Income before income taxes .. 20,344 24,153 26,465 25,667
Net income .................. 13,122 15,700 17,070 16,555
Basic earnings per share (2). 0.18 0.21 0.23 0.22
Year ended December 31, 2003
Operating revenue ........... $ 94,840 $102,800 $104,461 $103,015
Operating income ............ 16,207 18,653 21,488 28,749 (1)
Income before income taxes .. 16,746 19,146 21,959 29,292 (1)
Net income .................. 11,052 12,636 14,493 19,040 (1)
Basic earnings per share (2). 0.15 0.17 0.19 0.25 (1)
(1) See Note 5 to the consolidated financial statements.
(2) The above earnings per share data have been restated for the August 20,
2004 three-for-two stock split.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------
Charges To
--------------------
Balance At Cost Balance
Beginning And Other At End
Description of Period Expense Accounts Deductions of Period
- ----------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended December 31, 2004 $ 675,000 $ 142,157 $ - $ 42,157 $775,000
Year ended December 31, 2003 650,000 42,677 - 17,677 675,000
Year ended December 31, 2002 402,812 248,986 - 1,798 650,000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCOSURE
None.
ITEM 9A. CONTROL AND PROCEDURES
Evaluation of Disclosure Controls and Procedures - We have established
disclosure controls and procedures to ensure that material information relating
to the Company, including its consolidated subsidiaries, is made known to the
officers who certify the Company's financial reports and to other members of
senior management and the Board of Directors.
27
Based on their evaluation as of December 31, 2004, the principal executive
officer and principal financial officer of the Company have concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act),
are effective to ensure that the information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
Management's Report on Internal Control Over Financial Reporting - Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation
of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the
framework in Internal Control - Integrated Framework, our management concluded
that our internal control over financial reporting was effective as of
December 31, 2004. Our management's assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2004 has been
audited by KPMG LLP, an independent registered public accounting firm, as stated
in their report which is included herein.
Changes in Internal Control Over Financial Reporting - There was no change
in our internal control over financial reporting that occurred during the
quarter ended December 31, 2004, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Part III is presented under the
items entitled "Information Concerning Directors and Executive Officers,"
"Section 16(a) Beneficial Ownership Reporting Compliance," "Meetings and
Independent Directors," and "Code of Ethics" in the Company's Definitive Proxy
Statement for the Annual Meeting of Stockholders on May 12, 2005. Such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Part III is presented under the item
entitled "Executive Compensation" in the Company's Definitive Proxy Statement
for the Annual Meeting of Stockholders on May 12, 2005. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Part III is presented under the item
entitled "Security Ownership of Principal Stockholders and Management" in the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders on
May 12, 2005. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Part III is presented under the item
entitled "Certain Relationships and Related Transactions" in the Company's
Definitive Proxy Statement for the Annual Meeting of Stockholders on May 12,
2005. Such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding principal auditor fees and services is set forth
under "Principal Accounting Fees and Services" in the Proxy Statement, which
information is incorporated herein by reference.
28
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Schedules.
(a) (1) Financial Statements: See Part II, Item 8 hereof.
Page
----
Reports of Independent Registered Public Accounting Firm KPMG LLP......... 13-15
Consolidated Balance Sheets............................................... 16
Consolidated Statements of Operations..................................... 17
Consolidated Statements of Stockholders' Equity........................... 18
Consolidated Statements of Cash Flows..................................... 19
Notes to Consolidated Financial Statements................................ 20-26
(a) (2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves.............. 27
Schedules not listed have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
(a) (3) The Exhibits required by Item 601 of Regulation S-K are
listed at paragraph (b) below.
(b) Exhibits.
The following exhibits are filed with this Form 10-K or incorporated herein
by reference to the document set forth next to the exhibit listed below:
EXHIBIT INDEX
Exhibit No. Document Method of Filing
3.1 Articles of Incorporation Incorporated by reference to
the Company's registration
statement on Form S-1,
Registration No.33-8165,
effective November 5, 1986.
3.2 Bylaws Incorporated by reference to
the Company's registration
statement on Form S-1,
Registration No.33-8165,
effective November 5, 1986.
3.3 Certificate of Amendment Incorporated by reference to
to Articles of Incorporation the Company's Form 10-QA, for
the quarter ended June 30,
1997, dated March 20, 1998.
4.1 Articles of Incorporation Incorporated by reference to
the Company's registration
statement on Form S-1,
Registration No. 33-8165,
effective November 5, 1986.
4.2 Bylaws Incorporated by reference
to the Company's registration
statement on Form S-1,
Registration No.33-8165,
effective November 5, 1986.
29
4.3 Certificate of Amendment Incorporated by reference to
to Articles of Incorporation the Company's Form 10-QA, for
the quarter ended June 30,
1997, dated March 20, 1998.
9.1 Voting Trust Agreement dated Incorporated by reference to
June 6, 1997 between Larry the Company's Form 10-K for
Crouse as trustee under the year ended December 31,
the Gerdin Educational Trusts 1997. Commission file no.
and Larry Crouse voting trustee. 0-15087.
10.1 Business Property Lease Incorporated by reference to
between Russell A. Gerdin the Company's Form 10-Q for
as Lessor and the Company the quarter ended, September
as Lessee, regarding the 30, 2000. Commission file no.
Company's headquarters at 0-15087.
2777 Heartland Drive,
Coralville, Iowa 52241
10.2 Restricted Stock Agreement Incorporated by reference to
the Company's Form 10-K for
the year ended December 31,
2002. Commission file no.
0-15087.
16 Letter of Arthur Andersen LLP Incorporated by reference to
regarding change in certifying the Company's Form 10-K for
accountant. the year ended December 31,
2002. Commission file no.
0-15087.
21 Subsidiaries of the Registrant Filed herewith.
31.1 Certification of Chief Executive Filed herewith.
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 Filed herewith.
Officer pursuant to Rule 13a-14
(a) and Rule 15d-14(a) of the
Securities Exchange Act, as
amended.
32 Certification of Chief Filed herewith.
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.
30
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused the report to be signed on its behalf by
the undersigned thereunto duly authorized.
HEARTLAND EXPRESS, INC.
Date: February 28, 2005 By:/s/ Russell A. Gerdin
Russell A. Gerdin
President and Chief
Executive Officer
(principal executive officer)
Pursuant to the Securities Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.
Signature Title Date
/s/ Russell A. Gerdin Chairman, President and
Russell A. Gerdin Chief Executive Officer
and Secretary,
(principal executive officer) February 28, 2005
/s/ John P. Cosaert Executive Vice President
John P. Cosaert of Finance, Chief Financial
Officer and Treasurer
(principal accounting and
financial officer) February 28, 2005
/s/ Richard O. Jacobson Director
Richard O.Jacobson February 28, 2005
/s/ Michael J. Gerdin Vice President of Regional
Michael J. Gerdin Operations and Director February 28, 2005
/s/ Benjamin J. Allen Director
Benjamin J. Allen February 28, 2005
/s/ Lawrence D. Crouse Director
Lawrence D. Crouse February 28, 2005
31
Exhibit No. 21
Subsidiaries of the Registrant
State of
Incorporation
Heartland Express, Inc. Parent NV
A & M Express, Inc. Subsidiary TN
Heartland Equipment, Inc. Subsidiary NE
Heartland Express, Inc. of Iowa Subsidiary IA
32
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 annual report on Form 10-K of Heartland Express,
Inc. (the "registrant");
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 Rules
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 annual report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting 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 annual report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
annual report based on such evaluation; and
d) Disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's fourth 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 the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; 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: February 28, 2005 By: /s/ Russell A. Gerdin
Russell A. Gerdin
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
33
Exhibit No. 31.2
Certification
I, John P. Cosaert, Chairman, Executive Vice President and Chief Financial
Officer and Treasurer of Heartland Express, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Heartland Express, Inc.
(the "registrant");
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 Rules 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 annual report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting 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 annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this annual report based on such
evaluation; and
d) Disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's fourth 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 the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; 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: February 28, 2005 By: /s/ John P. Cosaert
John P. Cosaert
Executive Vice President-Finance
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
34
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, to my
knowledge, the Annual Report of Heartland Express, Inc., on Form 10-K for the
fiscal year ended December 31, 2004, fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
that the information contained in such Annual Report on Form 10-K fairly
presents, in all material respects, the financial condition and results of
operations of Heartland Express, Inc.
Dated: February 28, 2005 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, to my
knowledge, the Annual Report of Heartland Express, Inc., on Form 10-K for the
fiscal year ended December 31, 2004, fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
that the information contained in such Annual Report on Form 10-K fairly
presents, in all material respects, the financial condition and results of
operations of Heartland Express, Inc.
Dated: February 28, 2005 By: /s/ John P Cosaert
John P. Cosaert
Executive Vice President
And Chief Financial Officer
END OF REPORT
35