10-Q 1 tenq093004.txt 3RD QTR 2004 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended September 30, 2004 Commission File No. 0-15087 HEARTLAND EXPRESS, INC. (Exact Name of Registrant as Specified in Its Charter) Nevada 93-0926999 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 2777 Heartland Drive, Coralville, Iowa 52241 (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code (319)545-2728 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] At September 30, 2004, there were 75,000,000 shares of the Company's $.01 par value common stock outstanding. PART I FINANCIAL INFORMATION Page Number Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets September 30, 2004 and December 31, 2003 1-2 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2004 and 2003 3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 4 Notes to Consolidated Financial Statements 5-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Item 4. Controls and Procedures 12 PART II OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of 13 Security Holders Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13-17 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS September 30, December 31, 2004 2003 (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 6,587,179 $ 38,618,430 Investments 232,910,514 163,812,725 Trade receivables, less allowance of $775,000 and $675,000 39,552,428 36,836,728 Prepaid tires 2,927,590 2,529,580 Deferred income taxes 24,894,000 21,308,000 Other current assets 1,685,726 673,101 ------------ ------------- Total current assets 308,557,437 263,778,564 ------------ ------------- PROPERTY AND EQUIPMENT Land and land improvements 9,536,271 9,440,329 Buildings 17,494,255 17,006,260 Furniture and fixtures 1,210,424 1,210,424 Shop and service equipment 2,550,616 2,287,172 Revenue equipment 220,500,129 202,706,807 ------------ ------------- 251,291,695 232,650,992 Less accumulated depreciation 63,802,426 56,951,186 ------------ ------------- Property and equipment, net 187,489,269 175,699,806 ------------ ------------- OTHER ASSETS 9,016,455 8,928,186 ------------ ------------- $505,063,161 $448,406,556 ============ =============
The accompanying notes are an integral part of these consolidated financial statements. 1 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31, 2004 2003 (Unaudited) CURRENT LIABILITIES Accounts payable & accrued liabilities .... $ 16,762,333 $ 15,684,826 Compensation & benefits ................... 13,457,667 10,704,329 Income taxes payable ...................... 5,747,683 7,720,875 Insurance accruals ......................... 42,525,515 37,125,109 Other ..................................... 6,984,476 5,895,502 ------------- ------------- Total current liabilities ............... 85,477,674 77,130,641 ------------- ------------- DEFERRED INCOME TAXES ........................ 45,393,000 39,760,000 ------------- ------------- CONTINGENCIES STOCKHOLDERS' EQUITY Capital Stock: Preferred, $.01 par value; authorized 5,000,000 share; none issued ........... -- -- Common, $.01 par value; authorized 395,000,000 shares; issued and outstanding 75,000,000 in 2004 and 50,000,000 in 2003 ............... 750,000 500,000 Additional paid-in capital .............. 8,510,305 8,510,305 Retained earnings ....................... 365,851,547 323,710,296 ------------- ------------- 375,111,852 332,720,601 Less: unearned compensation ............. (919,365) (1,204,686) ------------- ------------- 374,192,487 331,515,915 ------------- ------------- $505,063,161 $448,406,556 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 2 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended Nine months ended September 30, September 30, 2004 2003 2004 2003 OPERATING REVENUE .......................... $ 117,299,278 $ 104,460,615 $ 337,647,731 $ 302,100,139 ------------- ------------- ------------- ------------- OPERATING EXPENSES: Salaries, wages, and benefits ........... $ 40,305,667 $ 34,949,275 $ 119,163,588 $ 102,452,186 Rent and purchased transportation ....... 8,578,807 12,090,171 28,620,347 39,194,285 Operations and maintenance .............. 25,297,575 19,094,695 68,954,053 56,546,521 Taxes and licenses ...................... 2,143,218 2,265,221 6,638,458 6,263,920 Insurance and claims .................... 2,562,377 3,384,300 10,454,595 9,919,671 Communications and utilities ............ 886,416 946,331 2,828,948 2,763,214 Depreciation ............................ 7,842,781 7,139,016 21,214,242 19,433,000 Other operating expenses ................ 4,020,431 3,080,052 10,935,875 9,185,983 (Gain) loss on disposal of fixed assets . 2,085 23,802 (99,804) (6,969) ------------- ------------- ------------- ------------- 91,639,357 82,972,863 268,710,302 245,751,811 ------------- ------------- ------------- ------------- Operating income ............. 25,659,921 21,487,752 68,937,429 56,348,328 Interest income ......................... 805,135 470,972 2,024,522 1,501,993 ------------- ------------- ------------- ------------- Income before income taxes ........... 26,465,056 21,958,724 70,961,951 57,850,321 Income taxes ............................ 9,395,071 7,465,967 25,070,700 19,669,108 ------------- ------------- ------------- -------------- Net income ........................... $ 17,069,985 $ 14,492,757 $ 45,891,251 $ 38,181,213 ============= ============= ============= ============== Earnings per common share: Basic earnings per share ............ $ 0.23 $ 0.19 $ 0.61 $ 0.51 ============= ============= ============= ============== Basic weighted average shares outstanding 75,000,000 75,000,000 75,000,000 75,000,000 ============= ============= ============= ============== Dividends declared per share ............ $ 0.020 $ 0.013 $ 0.047 $ 0.013 ============= ============= ============= ==============
The accompanying notes are an integral part of these consolidated financial statements. 3 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine months ended September 30, 2004 2003 ------------- -------------- OPERATING ACTIVITIES Net income ................................ $ 45,891,251 $ 38,181,213 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization .......... 21,229,245 19,448,003 Deferred income taxes .................. 2,047,000 3,626,000 Unearned compensation .................. 285,321 299,339 (Gain) on disposal of fixed assets ...... (99,804) (6,969) Changes in certain working capital items: Trade receivables ................... (2,715,700) (4,586,735) Other current assets ................ (1,012,625) (2,184,865) Prepaid expenses .................... (477,930) 1,867,040 Accounts payable and accrued expenses 9,712,699 11,265,120 Accrued income taxes ................ (1,973,192) 5,906,814 ------------- -------------- Net cash provided by operating activities 72,886,265 73,814,960 ------------- -------------- INVESTING ACTIVITIES Proceeds from sale of property and equipment 166,955 116,974 Capital additions ...................... (32,885,937) (40,672,757) Net purchases of municipal bonds ....... (69,097,789) (34,097,992) Change in other assets ................. (103,272) (623,526) ------------- -------------- Net cash used in investing activities .. (101,920,043) (75,277,301) ------------- -------------- FINANCING ACTIVITIES, cash dividend .......... (2,997,473) -- ------------- -------------- Net decrease in cash and cash equivalents (32,031,251) (1,462,341) CASH AND CASH EQUIVALENTS Beginning of period .................... 38,618,430 14,806,758 ------------- -------------- End of period .......................... $ 6,587,179 $ 13,344,417 ============= ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Income taxes,net .................... $ 24,996,892 $ 10,136,294 Noncash investing activities: Book value of revenue equipment traded $ 16,295,082 $ 1,686,114 The accompanying notes are an integral part of these consolidated financial statements. 4 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Heartland Express, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003 included in the Annual Report on Form 10-K of the Company filed with the Securities and Exchange Commission. Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other interim periods. Note 2. Reclassifications Certain reclassifications have been made in the financial statements to conform to the current year's presentation. Note 3. Segment Information The Company has nine operating divisions; however, it has determined that it has one reportable segment. All of the divisions are managed based on similar economic characteristics. Each of the regional operating divisions provides short-to-medium haul truckload carrier services of general commodities to a similar class of customers. In addition, each division exhibits similar financial performance, including average revenue per mile and operating ratio. As a result of the foregoing, the Company has determined that it is appropriate to aggregate its operating divisions into one reportable segment consistent with the guidance in SFAS No. 131. Accordingly, the Company has not presented separate financial information for each of its operating divisions as the Company's consolidated financial statements present its one reportable segment. Note 4. Investments Investments primarily include municipal bonds with interest reset provisions and short-term municipal bonds. The cost approximates the fair value due to the nature of the investments. Therefore, accumulated other comprehensive income (loss) has not been recognized as a separate component of stockholders' equity. Note 5. Cash and Cash Equivalents The Company previously reported municipal bonds with a reset provision of three months or less as cash equivalents. The Company is now classifying all municipal bonds based upon their original maturity date without respect to any reset provisions. Reclassifications have been completed on all prior periods reported herein to be consistent with this change. Note 6. Commitments and Contingencies The Company is party to ordinary, routine litigation and administrative proceedings incidental to its business. In the opinion of management, the Company's potential exposure under pending legal proceedings is adequately provided for in the accompanying consolidated financial statements. 5 The Company has commitments at September 30, 2004 to acquire revenue equipment for approximately $13.2 million in 2004, $45.0 million in 2005, and $45.4 million in 2006. These commitments are expected to be financed from existing cash and investment balances and cash flows from operations. Note 7. Property, Equipment, and Depreciation The Company's tractor fleet has historically been depreciated by the 125% declining balance method applied to cost, net of salvage value. Tractors purchased beginning in June, 2004 are being depreciated by the 125% declining balance method applied to the book value of the asset at the beginning of each period. The salvage value is no longer being deducted from the book value each period when computing the depreciation base used to calculate the declining balance depreciation and resulted in additional depreciation of $455,625 in the third quarter of 2004, while for the nine months ended September 30, 2004, depreciation has increased by $515,625. Effective April 1, 2003 the Company reduced the salvage value on its trailer fleet from $6,000 to $4,000 per trailer. This change in accounting estimate increased depreciation expense during the nine months ended September 30, 2003 by approximately $1.1 million. Total depreciation expense for 2003 was increased by approximately $1.7 million due to the reduction in salvage value. Note 8. Stock Split On July 21, 2004, the Board of Directors approved a three-for-two stock split, affected in the form of a fifty percent stock dividend. The stock split occurred on August 20, 2004, to shareholders of record as of August 9, 2004. This stock split increased the number of outstanding shares to 75.0 million from 50.0 million. The number of common shares issued and outstanding and all per share amounts have been adjusted to reflect the stock split for all periods presented. Note 9. Stock Based Compensation At September 30, 2004 the Company has a restricted stock award plan. The plan shares are being amortized over a five year period as compensation expense. Amortized compensation expense of $285,320 and $299,339 for the nine months ended September 30 2004 and 2003, respectively, is recorded in salaries, wages, and benefits on the statement of operations. The unamortized portion of the stock awards is recorded in stockholders' equity as unearned compensation. All unvested shares are included in the Company's 75.0 million outstanding shares. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements Except for certain historical information contained herein, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, assumptions and uncertainties which are difficult to predict. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including any projections of earnings, revenues, or other financial items; any statements of plans, strategies, and objectives of management for future operations; any statements concerning proposed new strategies or developments; any statements regarding future economic conditions or performance; any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as "believe," "may," "could," "expects," "anticipates," and "likely," and variations of these words or similar expressions, are intended to identify such forward-looking statements. The Company's actual results could differ materially from those discussed in the section entitled "Factors That May Affect Future Results," included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in the Company's Annual report on Form 10-K, which is by this reference incorporated herein. 6 The Company does not assume, and specifically disclaims, any obligation to update any forward-looking statements contained in this Quarterly report. Overview Heartland Express, Inc. is a short-to-medium haul truckload carrier. The Company transports freight for major shippers and generally earns revenue based on the number of miles per load delivered. During the first nine months of 2004, freight revenue before fuel surcharge increased 10.0% to $319.4 million from $290.3 million in the first nine months of 2003. The Company takes pride in the quality of the service that it provides to its customers. The keys to maintaining a high level of service are experienced drivers, reliable equipment and equipment availability. Heartland has one of the newest fleets in the industry with an average tractor age of 19 months and trailer age of 31 months. During April of 2004, the Company entered into an agreement to replace its entire tractor fleet by December 2006. The Company started taking delivery of the new tractors during June 2004. The Company expects future revenue equipment purchases to be financed using current cash and investment balances and cash flow provided by operations. The Company continues to work with shippers and drivers to minimize the impact of the revised DOT hours-of-service regulations that took effect on January 4, 2004. These revised regulations have had minimal effect on our operations to date primarily due to proper planning and customer cooperation. Fleet utilization is up slightly over the prior year. On July 16, 2004, the U. S. Court of Appeals for the District of Columbia issued a decision vacating the new hours-of-service regulations because of concerns for driver health and safety. On September 30, 2004 the extension of the Federal highway bill signed into law by the President extended the current hours of service rules for one year or whenever the FMCSA develops a new set of regulations, whichever comes first. The Federal Motor Carrier Safety Administration (FMCSA) will continue to enforce the new hours-of-service regulations during this period. The course of action by the FMCSA is unknown at this time. In addition to the revised hours-of-service regulations, the trucking industry is experiencing a shortage of qualified drivers. In order to attract and retain experienced drivers, the Company increased pay for all drivers $0.03 per mile during the first quarter of 2004. Effective October 2, 2004, the company began paying all drivers an additional $0.07 per mile for miles driven in the upper Northeastern United States. Management believes that the Company continues to offer one of the highest pay packages in the industry. This pay package along with increased recruiting efforts should allow the Company to attract additional qualified drivers; however, a long term shortage of drivers could hinder growth. Effective October 1, 2002, all newly manufactured truck engines must comply with the engine emission standards mandated by the Environmental Protection Agency (EPA). The new engines have resulted in a significant increase in the cost of new tractors and testing results indicate lower fuel efficiency and higher maintenance costs. All 2004 and future tractor purchases by the Company will include engines that conform to the new standards. As a result of these purchases, the operating costs associated with tractors are expected to increase. 7 Results of Operations: The following table sets forth the percentage relationship of expense items to operating revenue for the periods indicated. Three Months Nine Months Ended Ended September 30, September 30, 2004 2003 2004 2003 ------ ------ ------ ------ Operating revenue 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ Operating expenses: Salaries, wages, and benefits 34.3% 33.5% 35.3% 33.9% Rent and purchased transportation 7.3 11.6 8.5 13.0 Operations and maintenance 21.6 18.3 20.4 18.7 Taxes and licenses 1.8 2.2 2.0 2.1 Insurance and claims 2.2 3.2 3.1 3.3 Communications and utilities 0.8 0.9 0.8 0.9 Depreciation 6.7 6.8 6.3 6.4 Other operating expenses 3.4 2.9 3.2 3.0 (Gain) loss on disposal of fixed assets - - - - ------ ------ ------ ------ Total operating expenses 78.1% 79.4% 79.6% 81.3% ------ ------ ------ ------ Operating income 21.9% 20.6% 20.4% 18.7% Interest income 0.7 0.4 0.6 0.4 ------ ------ ------ ------ Income before income taxes 22.6% 21.0% 21.0% 19.1% Federal and state income taxes 8.0 7.1 7.4 6.5 ------ ------ ------ ------ Net income 14.6% 13.9% 13.6% 12.6% ====== ====== ====== ====== The following is a discussion of the results of operations of the three and nine month periods ended September 30, 2004 compared with the same periods in 2003, and the changes in financial condition through the third quarter of 2004. Three Months Ended September 30, 2004 and 2003 Operating revenue increased $12.8 million (12.3%), to $117.3 million in the third quarter of 2004 from $104.5 million in the third quarter of 2003. The increase in revenue resulted from additional business from existing customers, growth of our customer base, rate increases, effective management of traffic lanes, and accessorial charges for fuel surcharge and equipment detention. Fuel surcharge revenue increased $3.9 million to $7.4 million in the third quarter of 2004 from $3.5 million in the third quarter of 2003. Salaries, wages, and benefits increased $5.4 million (15.3%), to $40.3 million in the third quarter of 2004 from $34.9 million in the third quarter of 2003. These increases were primarily the result of increased reliance on employee drivers due to a decrease in the number of independent contractors utilized by the Company and a driver pay increase. During the third quarter of 2004, employee drivers accounted for 89% and independent contractors 11% of the total fleet miles, compared with 83% and 17%, respectively, in the third quarter of 2003. The Company also increased pay for all drivers $0.03 per mile during the first quarter of 2004. During the third quarter of 2004, the Company experienced an increase in workers' compensation expense due to an increase in the frequency and severity of claims. Rent and purchased transportation decreased $3.5 million (29.0%), to $8.6 million in the third quarter of 2004 from $12.1 million in the third quarter of 8 2003. This reflects the Company's decreased reliance upon independent contractors. Rent and purchased transportation for both periods includes amounts paid to independent contractors under the Company's fuel stability program. Operations and maintenance increased $6.2 million (32.5%) to $25.3 million in the third quarter of 2004 from $19.1 million in the third quarter of 2003. The increase in operations and maintenance is attributable to increased fuel costs due to the increased percentage of fleet miles driven by employee drivers and record high fuel prices during the third quarter of 2004. Fuel expense increased $6.5 million (42.9%) in the third quarter of 2004 as compared to the same period in 2003. Insurance and claims decreased $0.8 million (24.3%), to $2.6 million in the third quarter of 2004 from $3.4 million in the third quarter of 2003. Insurance and claims expense will vary as a percentage of operating revenue from period to period based on the frequency and severity of claims incurred in a given period as well as changes in claims development trends. The company experienced an improvement in frequency and severity of claims during the quarter. Depreciation increased $0.7 million (9.9%) to $7.8 million during the third quarter of 2004 from $7.1 million in the third quarter of 2003. Depreciation expense increased for the quarter due to the addition of new revenue equipment to the fleet and the change in depreciation methodology as discussed in Note 7 of these financial statements. Other operating expenses increased $0.9 million (30.5%) to $4.0 million during the third quarter of 2004 from $3.1 million during the third quarter of 2003. Other operating expenses consist primarily of costs incurred for freight handling, highway tolls, driver recruiting expenses, and administrative costs. For the period, freight handling increased by $0.4 million over the compared 2003 period. The Company's effective tax rate was 35.5% and 34.0% for the third quarter of 2004 and 2003, respectively. Income taxes have been provided at the statutory federal and state rates, adjusted for certain permanent differences between financial statement income and income for tax reporting. The Company has experienced a slight increase in the overall state tax rates. As a result of the foregoing, the Company's operating ratio (operating expenses as a percentage of operating revenue) was 78.1% during the third quarter of 2004 compared with 79.4% during the third quarter of 2003. Net income increased $2.6 million (17.8%), to $17.1 million during the third quarter of 2004 from $14.5 million during the third quarter of 2003. Nine Months Ended September 30, 2004 and 2003 Operating revenue increased $35.5 million (11.8%), to $337.6 million in the nine months ended September 30, 2004 from $302.1 million in the 2003 period. The increase in revenue resulted from additional business from existing customers, growth of our customer base, rate increases, effective management of traffic lanes, and accessorial charges for fuel surcharge and equipment detention. Fuel surcharge revenue increased $6.5 million to $18.3 million for the nine months ended September 30, 2004 from $11.8 million in the compared 2003 period. Salaries, wages, and benefits increased $16.7 million (16.3%), to $119.2 million in the nine months ended September 30, 2004 from $102.5 million in the 2003 period. These increases were a result of increased reliance on employee drivers due to a decrease in the number of independent contractors utilized by the Company and a driver pay increase. During the first nine months of 2004, employee drivers accounted for 87% and independent contractors 13% of the total fleet miles, compared with 81% and 19%, respectively, in the compared 2003 period. The Company also increased pay for all drivers $0.03 per mile during the first quarter of 2004. In addition, the Company incurred increased workers' compensation costs during the nine month period of 2004 due to an increase in the frequency and severity of workers' compensation claims during the 2004 period. 9 Rent and purchased transportation decreased $10.6 million (27.0%), to $28.6 million in the first nine months of 2004 from $39.2 million in the 2003 period. This reflects the Company's decreased reliance upon independent contractors. Rent and purchased transportation for both periods includes amounts paid to independent contractors under the Company's fuel stability program. Operations and maintenance increased $12.4 million (21.9%) to $69.0 million in the nine months ended September 30, 2004 from $56.6 million in the 2003 period. The increase in operations and maintenance is attributable to increased fuel costs due to the increased percentage of fleet miles driven by employee drivers and record high fuel prices during the first nine months of 2004. Fuel costs increased by $12.6 million (27.1%) in the nine months ended September 30, 2004 as compared to the 2003 period. Insurance and claims increased $0.5 million (5.4%), to $10.5 million in the first nine months of 2004 from $10.0 million in the compared 2003 period. Insurance and claims expense will vary as a percentage of operating revenue from period to period based on the frequency and severity of claims incurred in a given period as well as changes in claims development trends. Depreciation increased $1.8 million (9.2%) to $21.2 million during the first nine months of 2004 from $19.4 million in the compared 2003 period. Effective April 1, 2003, the Company decreased the salvage value on all trailers to $4,000 from $6,000. The reduction of salvage value increased depreciation expense by approximately $1.1 million on a comparative basis. The change in depreciation methodology as discussed in Note 7 of these financial statements resulted additional depreciation expense for the 2004 period. Other operating expenses increased $1.7 million (19.0%) to $10.9 million during the first nine months 2004 from $9.2 million during the compared 2003 period. Other operating expenses consist primarily of freight handling, highway tolls, drivers recruiting expenses, and administrative costs. Freight handling expenses increased $1.0 million while advertising and toll expenses increased by a combined $0.5 million over the compared 2003 period. The Company's effective tax rate was 35.3% and 34.0% for the nine months ended September 30, 2004 and 2003, respectively. Income taxes have been provided at the statutory federal and state rates, adjusted for certain permanent differences between financial statement income and income for tax reporting. The Company has experienced a slight increase in the overall state tax rates. As a result of the foregoing, the Company's operating ratio (operating expenses as a percentage of operating revenue) was 79.6% during the first nine months of 2004 compared with 81.3% during the first nine months of 2003. Net income increased $7.7 million (20.2%), to $45.9 million during the first nine months of 2004 from $38.2 million during the compared 2003 period. Liquidity and Capital Resources The growth of the Company's business has required significant investments in new revenue equipment. Historically the Company has been debt-free, funding revenue equipment purchases with cash flow provided by operations. The Company also obtains tractor capacity by utilizing independent contractors, who provide a tractor and bear all associated operating and financing expenses. The Company's primary source of liquidity for the nine months ended September 30, 2004, was net cash provided by operating activities of $72.9 million compared to $73.8 million in the corresponding 2003 period. Capital expenditures for property and equipment, primarily revenue equipment net of trade-ins, totaled $32.9 million for the first nine months of 2004 compared to $40.7 million for the same period in 2003. Capital expenditures for the third quarter of 2004 of $17.8 million were primarily related to the current replacement of the Company's tractor fleet scheduled to be completed in 2006. 10 Net cash paid for income taxes increased to $25.0 million during the nine months ended September 30, 2004 from $10.1 million in the 2003 nine month period. The increase was primarily related to an increase in Federal estimated tax payments due to a decline in federal bonus depreciation during this year's estimate computation period. Management believes the Company has adequate liquidity to meet its current and projected needs. The Company will continue to have significant capital requirements over the long term. Future capital expenditures are expected to be funded by cash flow provided by operations and from existing cash, cash equivalents, and investments. The Company ended the quarter with $239.5 million in cash, cash equivalents, and investments and no debt. Based on the Company's strong financial position, management believes outside financing could be obtained, if necessary, to fund capital expenditures. Factors That May Affect Future Results The Company's future results may be affected by a number of factors over which the Company has little or no control. Fuel prices, insurance and claims costs, liability claims, interest rates, the availability of qualified drivers, fluctuations in the resale value of revenue equipment, economic and customer business cycles and shipping demands are economic factors over which the Company has little or no control. In addition to the economic factor, regulatory and other governmental factors such as the hours-of-service regulation Significant increases or rapid fluctuations in fuel prices, interest rates or insurance and claims costs, to the extent not offset by increases in freight rates, and the resale value of revenue equipment could reduce the Company's profitability. Weakness in the general economy, including a weakness in consumer demand for goods and services, could adversely affect the Company's customers and the Company's growth and revenues, if customers reduce their demand for transportation services. Customers encountering adverse economic conditions represent a greater potential for loss, and the Company may be required to increase its reserve for bad debt losses. Weakness in customer demand for the Company's services or in the general rate environment may also restrain the Company's ability to increase rates or obtain fuel surcharges. Effective October 1, 2002, EPA emissions control regulations require that newly manufactured diesel engines must satisfy considerably more restrictive emissions standards. Additional changes to engine design requirements will take effect in 2007. The costs of compliance with the EPA engine design requirements have significantly increased new equipment prices and further increases may result in connection with the implementation of the 2007 standards. In addition, the EPA compliant engines are less fuel efficient. To the extent we are unable to offset increased expenses associated with the EPA mandate with rate increases or cost savings, our results of operations could be adversely affected. Inflation and Fuel Cost Most of the Company's operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices and the compensation paid to the drivers. Innovations in equipment technology and comfort have resulted in higher tractor prices, and there has been an industry-wide increase in wages paid to attract and retain qualified drivers. The Company historically has limited the effects of inflation through increases in freight rates and certain cost control efforts. In addition to inflation, fluctuations in fuel prices can affect profitability. Fuel prices have fluctuated widely during recent years and are currently at record high levels. Most of the Company's contracts with customers contain fuel surcharge provisions. Although the Company historically has been able to pass through most long-term increases in fuel prices and fuel taxes to customers in the form of surcharges and higher rates, short-term increases are not fully recovered. Competitive conditions in the transportation industry, such as lower demand for transportation services, could affect the Company's ability to obtain rate increases or fuel surcharges. The Company currently does not have 11 any long-term fuel purchase contracts and we have not entered into any other hedging arrangements that protect us against fuel price increases. The Company has not experienced difficulties in maintaining necessary fuel supplies. Seasonality The nature of the Company's primary traffic (appliances, automotive parts, paper products, retail goods, and packages foodstuffs) causes it to be distributed with relative uniformity throughout the year. However, seasonal variations during and after the winter holiday season have historically resulted in reduced shipments by several industries served. In addition, the Company's operating expenses historically have been higher during the winter months due to increased operating costs and higher fuel consumption in colder weather. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company purchases only high quality, liquid investments. Primarily all investments as of September 30, 2004 have an original maturity or interest reset date of twelve months or less. Due to the short term nature of the investments, the Company is exposed to minimal market risk related to its cash equivalents and investments. The Company has no debt outstanding as of September 30, 2004 and therefore, has no market risk related to debt. As of September 30, 2004, the Company has no derivative financial instruments to reduce its exposure to fuel price fluctuations. Item 4. Controls and Procedures As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of the Company's disclosure controls and procedures, and as defined in Exchange Act Rule 15d-15(e). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in enabling the Company to record, process, summarize and report information required to be included in the Company's periodic SEC filings within the required time period. There have been no changes in the Company's internal controls over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 12 PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to ordinary, routine litigation and administrative proceedings incidental to its business. None of the claims would materially impact net income or financial position. These proceedings primarily involve claims for personal injury and property damage incurred in connection with the transportation of freight. The Company maintains insurance to cover liabilities arising from the transportation of freight for amounts in excess of certain self-insured retentions. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K 1. Report on Form 8-K, dated July 22, 2004, announcing the Company's financial results for the quarter ended June 30, 2004. 2. Report on Form 8-K, dated July 27, 2004, announcing the a three-for-two stock split in the form of a 50% stock dividend to e paid on August 20, 2004 to stockholder's of record as of August 9, 2004. 3. Report on Form 8-K, dated September 9, 2004, announcing the declaration of a quarterly cash dividend. No other information is required to be filed under Part II of the form. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. HEARTLAND EXPRESS, INC. Date: November 5, 2004 BY: /s/ John P. Cosaert John P. Cosaert Executive Vice President-Finance, Chief Financial Officer and Treasurer (principal accounting and financial officer) 14 Exhibit No. 31.1 Certification I, Russell A. Gerdin, Chairman, President and Chief Executive Officer of Heartland Express, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Heartland Express, Inc. (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or cause such disclosure controls and procedures to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls: and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2004 BY: /s/ Russell A. Gerdin Russell A. Gerdin Chairman, President and Chief Executive Officer 15 Exhibit No. 31.2 Certification I, John P. Cosaert, Executive Vice President, Chief Financial Officer and Treasurer of Heartland Express, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Heartland Express, Inc. (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Designed such internal control over financial reporting, or cause such disclosure controls and procedures to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls: and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2004 BY: /s/ John P. Cosaert John P. Cosaert Executive Vice President-Finance Chief Financial Officer and Treasurer (principal accounting and financial officer) 16 Exhibit No. 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Russell A. Gerdin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Heartland Express, Inc., on Form 10-Q for the period ended September 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Heartland Express, Inc. Dated: November 5, 2004 By: /s/ Russell A. Gerdin Russell A. Gerdin Chairman, President and Chief Executive Officer I, John P. Cosaert, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Heartland Express, Inc., on Form 10-Q for the period ended September 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Heartland Express, Inc. Dated: November 5, 2004 By:/s/ John P. Cosaert John P. Cosaert Executive Vice President and Chief Financial Officer 17 END OF REPORT