10-K 1 tenk123104.txt 2004 10-K 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