2
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, 2005
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 Identification No.)
of Incorporation)
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:
Common stock, $0.01 par value The NASDAQ National Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES [ X ] NO [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 of Section 15(d) of the Act. YES [ ] NO [ X ]
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 a large 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 definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [ X ]
The aggregate market value of voting common stock held by non-affiliates of the
registrant as of June 30, 2005 was $860,008,000. As of February 28, 2006 there
were 73,821,500 shares of the Company's common stock ($0.01 par value)
outstanding.
Portions of the Proxy Statement for the annual shareholders' meeting to be held
on May 11, 2006 are incorporated by reference in Part III.
TABLE OF CONTENTS
Page
Part I
Item 1. Business 1
Item 1A. Risk Factors 5
Item 1B. Unresolved Staff Comments 9
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 19
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
Item 9A. Controls and Procedures 32
Item 9B. Other Information 34
Part III
Item 10. Directors and Executive Officers of the Registrant 34
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 34
Item 13. Certain Relationships and Related Transactions 34
Item 14. Principal Accounting Fees and Services 34
Part IV
Item 15. Exhibits, Financial Statement Schedule 35
PART I
ITEM 1. BUSINESS
This Annual Report contains certain statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. Such statements may be identified by their use of terms or phrases
such as "expects," "estimates," "projects," "believes," "anticipates,"
"intends," and similar terms and phrases. Forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be predicted
or quantified, which could cause future events and actual results to differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Readers should review and consider the factors
discussed in "Risk Factors" of this Annual Report on Form 10-K, along with
various disclosures in our press releases, stockholder reports, and other
filings with the Securities and Exchange Commission. We disclaim any obligation
to update or revise any forward-looking statements to reflect actual results or
changes in the factors affecting the forward-looking information.
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. In the second quarter of 2005, the Company expanded to the Western
United States with the opening of a terminal in Phoenix, Arizona. 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 nineteen years from 1986 to 2005, Heartland
has grown to $523.8 million in revenue from $21.6 million and net income has
increased to $71.9 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. More
information regarding the Company's revenues, profits, and assets for the past
three years can be found in our "Consolidated Balance Sheets" and "Consolidated
Statements of Income" that are included in this report.
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. These five acquisitions have enabled Heartland to solidify its
position within existing regions, expand into new operating regions, and to
pursue new customer relationships in new markets. The Company will continue to
evaluate acquisition candidates that meet its financial and operating
objectives.
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. The Company operates as one reportable operating
segment.
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 (the "DOT") compliance, customer
needs and service requirements, equipment utilization, driver time at home,
operational efficiency, and equipment maintenance needs.
1
Fleet management employees are responsible for driver management and
development. 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 (523-mile average length of haul in
2005) permits the Company to use primarily single, rather than team drivers and
dispatch most loads directly from origin to destination without an intermediate
equipment change other than for driver scheduling purposes.
Heartland also operates eight specialized regional distribution operations
in Atlanta, Georgia; Carlisle, Pennsylvania; Columbus, Ohio; Jacksonville,
Florida; Kingsport, Tennessee; Chester, Virginia; Olive Branch, Mississippi; and
Phoenix, Arizona. 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.
Personnel at the regional locations manage these operations, and the
Company uses a centralized computer network and regular communication to achieve
company-wide load coordination.
The Company emphasizes customer satisfaction through on-time performance,
dependable late-model equipment, and consistent equipment availability to meet
the volume requirements of its large customers. The Company also maintains a
high trailer to tractor ratio, which facilitates the positioning of trailers at
customer locations for convenient loading and unloading. This minimizes waiting
time, which increases tractor utilization and promotes driver retention.
Customers and Marketing
The Company targets customers in its operating area with multiple,
time-sensitive shipments, including those utilizing "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 for 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 lane density in the Company's primary traffic lanes will minimize empty
miles and enhance driver "home time."
The Company's 25, 10, and 5 largest customers accounted for 61%, 43%, and
32% of revenue, respectively, in 2005. 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% of revenue in
2005. 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. 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 Employees
Heartland relies on its workforce in achieving its business objectives. As
of December 31, 2005, Heartland employed 3,029 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 highway use taxes. The Company historically has operated a combined fleet of
company and independent contractor tractors.
2
Management's strategy for both employee drivers and independent contractors
is to (1) hire only safe and experienced drivers; (2) promote retention with an
industry leading compensation package, 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
generally compensated on the basis of miles driven including empty 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.
Revenue Equipment
Heartland's management believes that operating high-quality, efficient
equipment is an important part of providing excellent service to customers. All
tractors are equipped with satellite-based mobile communication systems. This
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 its entire tractor fleet with trucks manufactured by Navistar
International Corporation. Primarily all 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 periodically inspected by the Company for
compliance with operational and safety requirements of the Company and the DOT.
Effective October 1, 2002, the Environmental Protection Agency (the "EPA")
implemented engine requirements designed to reduce emissions. These new emission
standards have resulted in a significant increase in the cost of new tractors,
lower fuel efficiency, and higher maintenance costs. The EPA has mandated
additional engine emissions requirements that will take effect in 2007.
Compliance with the 2007 standards is expected to further increase the cost of
new tractors, decrease fuel economy, and increase maintenance costs. The
inability to recover these cost increases with rate increases or cost reduction
efforts could adversely affect the Company's results of operations.
Fuel
The Company purchases fuel through a network of approximately 28 fuel stops
throughout the United States at which the Company has negotiated price
discounts. Bulk fuel sites are maintained at 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 fragmented with thousands
of carriers of varying sizes. The Company competes with other truckload
carriers; primarily those serving the regional, short-to-medium haul market.
Logistics providers, railroads, less-than-truckload carriers, and private fleets
provide additional competition but to a lesser extent. The industry is highly
competitive based primarily upon freight rates, service, and equipment
availability. The Company competes effectively by providing high-quality service
and meeting the equipment needs of targeted shippers. In addition, there is a
strong competition within the industry for hiring of drivers and independent
contractors.
3
Safety and Risk Management
We are committed to promoting and maintaining a safe operation. Our safety
program is designed to minimize accidents and to conduct our business within
governmental safety regulations. The Company hires only safe and experienced
drivers. We communicate safety issues with drivers on a regular basis and
emphasize safety through equipment specifications and regularly scheduled
maintenance intervals. Our drivers are compensated and recognized for the
achievement of a safe driving record.
The primary risks associated with our business include cargo loss and
physical damage, personal injury, property damage, and workers' compensation
claims. The Company self-insures a portion of the exposure related to all of the
aforementioned risks. Insurance coverage including self-insurance retention
levels are evaluated on an annual basis. The Company actively participates in
the settlement of each claim incurred.
The Company self-insures auto liability (personal injury and property
damage) claims up to $1.0 million per occurrence. In addition, the Company is
responsible for the first $2.0 million in the aggregate for all claims in excess
of $1.0 million and below $2.0 million. Liabilities in excess of these amounts
and up to $50.0 million per occurrence are assumed by an insurance company. The
Company assumes any liability in excess of $50.0 million. Catastrophic physical
damage coverage is carried to protect against natural disasters. The Company
self-insures workers' compensation claims up to $1.0 million per occurrence. The
Company increased the retention amount from $500,000 to $1.0 million effective
April 1, 2005. All amounts in excess of $1.0 million are covered by an insurance
company. In addition, primary and excess coverage is maintained for employee
medical and hospitalization expenses.
Regulation
The Company is a common and contract motor carrier regulated by the DOT and
various state and local agencies. The DOT generally governs matters such as
safety requirements, registration to engage in motor carrier operations,
insurance requirements, 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.
The Federal Motor Carrier Safety Administration (the "FMCSA") of the U.S.
Department of Transportation issued a final rule on April 24, 2003, that made
several changes to the regulations governing the hours of service for drivers of
commercial vehicles that deliver freight. The new rules became effective on
January 4, 2004. On July 16, 2004, the U.S. Circuit Court of Appeals for the
District of Columbia rejected the new hours of service rules for truck drivers,
contending that the FMCSA had failed to properly address the impact of the rules
on the health of drivers as required by Congress. On September 30, 2004, the
extension of the federal highway bill signed into law by the President extended
the previously vacated 2003 hours of service rules until the FMCSA could adopt a
new set of regulations, but not later than September 30, 2005. Effective October
1, 2005, all truckload carriers became subject to revised hours of service
regulations. The only significant change from the previous regulations is that a
driver using the sleeper berth provision must take at least eight consecutive
hours in the sleeper berth during their ten hours off-duty. Previously, drivers
were allowed to split their ten hour off-duty time in the sleeper berth into two
periods, provided neither period was less than two hours. This more restrictive
sleeper berth provision is requiring some drivers to more efficiently plan their
schedules and may have a negative impact on mileage productivity. It is expected
that the greatest impact will be for multiple-stop shipments or those shipments
with pickup or delivery delays. Multiple-stop shipments are an insignificant
portion of the Company's business. The Company has avoided a significant
disruption in productivity through proper planning and customer communications
in an effort to more efficiently schedule driver loading and unloading of
freight.
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. These laws and regulations include the
management of underground fuel storage tanks, the transportation of hazardous
materials, the discharge of pollutants into the air and surface and underground
waters, and the disposal of hazardous waste.
4
The Company transports an insignificant number of hazardous material shipments.
Management believes that its operations are in 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 (the "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.
ITEM 1A. RISK FACTORS
Our future results may be affected by a number of factors over which we
have little or no control. The following issues, uncertainties, and risks, among
others, should be considered in evaluating our business and growth outlook.
Our business is subject to general economic and business factors that are
largely out of our control.
Our business is dependent on a number of factors that may have a materially
adverse effect on our results of operations, many of which are beyond our
control. The most significant of these factors are recessionary economic cycles,
changes in customers' inventory levels, excess tractor or trailer capacity in
comparison with shipping demand, and downturns in customers' business cycles.
Economic conditions, particularly in market segments and industries where we
have a significant concentration of customers and in regions of the country
where we have a significant amount of business, that decrease shipping demand or
increase the supply of tractors and trailers can exert downward pressure on
rates or equipment utilization, thereby decreasing asset productivity. Adverse
economic conditions also may harm our customers and their ability to pay for our
services. Customers encountering adverse economic conditions represent a greater
potential for loss, and we may be required to increase our allowance for
doubtful accounts.
We are also subject to increases in costs that are outside of our control
that could materially reduce our profitability if we are unable to increase our
rates sufficiently. Such cost increases include, but are not limited to,
declines in the resale value of used equipment, increases in interest rates,
fuel prices, taxes, tolls, license and registration fees, insurance, revenue
equipment, and healthcare for our employees. We could be affected by strikes or
other work stoppages at our facilities or at customer, port, border, or other
shipping locations.
In addition, we cannot predict the effects on the economy or consumer
confidence of actual or threatened armed conflicts or terrorist attacks, efforts
to combat terrorism, military action against a foreign state or group located in
a foreign state, or heightened security requirements. Enhanced security measures
could impair our operating efficiency and productivity and result in higher
operating costs.
Our growth may not continue at historic rates.
Historically, we have experienced significant and rapid growth in revenue
and profits. There can be no assurance that our business will continue to grow
in a similar fashion in the future or that we can effectively adapt our
management, administrative, and operational systems to respond to any future
growth. Further, there can be no assurance that our operating margins will not
be adversely affected by future changes in and expansion of our business or by
changes in economic conditions.
5
Increased prices, reduced productivity, and restricted availability of new
revenue equipment may adversely affect our earnings and cash flows.
We have experienced higher prices for new tractors over the past few years,
partially as a result of government regulations applicable to newly manufactured
tractors and diesel engines, in addition to higher commodity prices and better
pricing power among equipment manufacturers. More restrictive Environmental
Protection Agency, or EPA, emissions standards for 2007 will require vendors to
introduce new engines. We have decided to upgrade our fleet with pre-2007
engines and other carriers may seek to do the same, possibly leading to
shortages. Our business could be harmed if we are unable to continue to obtain
an adequate supply of new tractors and trailers for these or other reasons. As a
result, we expect to continue to pay increased prices for equipment and incur
additional expenses and related financing costs for the foreseeable future.
Furthermore, when we do decide to purchase tractors with post-2007 engines, such
engines are expected to reduce equipment productivity and lower fuel mileage
and, therefore, increase our operating expenses. At December 31, 2005, 68.6% of
our tractor fleet was comprised of tractors with pre-2007 engines that meet
EPA-mandated clean air standards. Our entire tractor fleet will be comprised of
tractors with such engines by the end of 2006.
In addition, a decreased demand for used revenue equipment could adversely
affect our business and operating results. We rely on the sale and trade-in of
used revenue equipment to offset the cost of new revenue equipment. The demand
for used revenue equipment is currently stable. However, a reversal of this
trend could result in lower market values. This would increase our capital
expenditures for new revenue equipment and increase our maintenance costs if
management decides to extend the use of revenue equipment in a depressed market.
If fuel prices increase significantly, our results of operations could be
adversely affected.
We are subject to risk with respect to purchases of fuel. Prices and
availability of petroleum products are subject to political, economic, and
market factors that are generally outside our control. Political events in the
Middle East, Venezuela, and elsewhere and hurricanes, and other weather-related
events, also may cause the price of fuel to increase. Because our operations are
dependent upon diesel fuel, significant increases in diesel fuel costs could
materially and adversely affect our results of operations and financial
condition if we are unable to pass increased costs on to customers through rate
increases or fuel surcharges. Historically, we have sought to recover a portion
of short-term increases in fuel prices from customers through fuel surcharges.
Fuel surcharges that can be collected do not always fully offset the increase in
the cost of diesel fuel. To the extent we are not successful in these
negotiations our results of operations may be adversely affected.
Difficulty in driver and independent contractor recruitment and retention may
have a materially adverse effect on our business.
Difficulty in attracting or retaining qualified drivers, including
independent contractors, could have a materially adverse effect on our growth
and profitability. Our independent contractors are responsible for paying for
their own equipment, fuel, and other operating costs, and significant increases
in these costs could cause them to seek higher compensation from us or seek
other opportunities within or outside the trucking industry. In addition,
competition for drivers, which is always intense, continues to increase. If a
shortage of drivers should continue, or if we were unable to continue to attract
and contract with independent contractors, we could be forced to limit our
growth, experience an increase in the number of our tractors without drivers,
which would lower our profitability, or be required to further adjust our driver
compensation package. We have increased our driver compensation on several
occasions recently, and we are implementing additional pay increases in certain
areas in 2006. Increases in driver compensation could adversely affect our
profitability if not offset by a corresponding increase in rates.
We operate in a highly regulated industry, and increased costs of compliance
with, or liability for violation of, existing or future regulations could have a
materially adverse effect on our business.
Our operations are regulated and licensed by various U.S. agencies. Our
company drivers and independent contractors also must comply with the safety and
fitness regulations of the United States Department of Transportation, or DOT,
including those relating to drug and alcohol testing and hours-of-service. Such
matters as weight and equipment dimensions are also subject to U.S. regulations.
We also may become subject to new or more restrictive regulations relating to
fuel emissions, drivers' hours-of-service, ergonomics, or other matters
affecting safety or operating methods. Other agencies, such as the EPA and the
Department of Homeland Security, or DHS, also regulate our equipment,
operations, and drivers.
6
Future laws and regulations may be more stringent and require changes in our
operating practices, influence the demand for transportation services, or
require us to incur significant additional costs. Higher costs incurred by us,
or by our suppliers who pass the costs onto us through higher prices, could
adversely affect our results of operations.
The DOT, through the Federal Motor Carrier Safety Administration Act, or
FMCSA, imposes safety and fitness regulations on us and our drivers. New rules
that limit driver hours-of-service were adopted effective January 4, 2004, and
then modified effective October 1, 2005. The rules effective October 1, 2005,
did not substantially change the existing rules but are likely to create a
moderate reduction in the amount of time available to drivers in longer lengths
of haul, which could reduce equipment productivity in those lanes. The FMCSA is
studying rules relating to braking distance and on-board data recorders that
could result in new rules being proposed. We are unable to predict the effect of
any proposed rules, but we expect that any such proposed rules would increase
costs in our industry, and the on-board recorders potentially could decrease
productivity and the number of people interested in being drivers.
In the aftermath of the September 11, 2001 terrorist attacks, federal,
state, and municipal authorities have implemented and continue to implement
various security measures, including checkpoints and travel restrictions on
large trucks. The Transportation Security Administration, or TSA, of the DHS has
adopted regulations that require determination by the TSA that each driver who
applies for or renews his or her license for carrying hazardous materials is not
a security threat. This could reduce the pool of qualified drivers, which could
require us to increase driver compensation, limit our fleet growth, or let
trucks sit idle. These regulations also could complicate the matching of
available equipment with hazardous material shipments, thereby increasing our
response time on customer orders and our non-revenue miles. As a result, it is
possible we may fail to meet the needs of our customers or may incur increased
expenses to do so. These security measures could negatively impact our operating
results.
Some states and municipalities have begun to restrict the locations and
amount of time where diesel-powered tractors, such as ours, may idle, in order
to reduce exhaust emissions. These restrictions could force us to alter our
drivers' behavior, purchase on-board power units that do not require the engine
to idle, or face a decrease in productivity.
Our operations are subject to various environmental laws and regulations, the
violation of which could result in substantial fines or penalties.
In addition to direct regulation by the DOT and other agencies, we are
subject to various environmental laws and regulations dealing with the handling
of hazardous materials, underground fuel storage tanks, and discharge and
retention of storm-water. We operate in industrial areas, where truck terminals
and other industrial facilities are located, and where groundwater or other
forms of environmental contamination have occurred. Our operations involve the
risks of fuel spillage or seepage, environmental damage, and hazardous waste
disposal, among others. We also maintain bulk fuel storage and fuel islands at
the majority of our facilities.
If we are involved in a spill or other accident involving hazardous
substances, or if we are found to be in violation of applicable laws or
regulations, it could have a materially adverse effect on our business and
operating results. If we should fail to comply with applicable environmental
regulations, we could be subject to substantial fines or penalties and to civil
and criminal liability.
Our business also is subject to the effects of new tractor engine design
requirements implemented by the EPA such as those that became effective October
1, 2002, and are expected to become effective in 2007 which are discussed above
under "Risk Factors - Increased prices for, or increased costs of operating, new
revenue equipment may materially and adversely affect our earnings and cash
flow." Additional changes in the laws and regulations governing or impacting 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.
We may not make acquisitions in the future, or if we do, we may not be
successful in integrating the acquired company, either of which could have a
materially adverse effect on our business.
Historically, acquisitions have been a part of our growth. There is no
assurance that we will be successful in identifying, negotiating, or
consummating any future acquisitions. If we fail to make any future
acquisitions, our growth rate could be materially and adversely affected. Any
acquisitions we undertake could involve the dilutive issuance of equity
securities and/or incurring indebtedness. In addition, acquisitions involve
numerous risks, including difficulties in assimilating the acquired company's
operations, the diversion of our management's attention from other business
concerns, risks of entering into markets in which we have had no or only limited
direct experience, and the potential loss of customers, key employees, and
7
drivers of the acquired company, all of which could have a materially adverse
effect on our business and operating results. If we make acquisitions in the
future, we cannot guarantee that we will be able to successfully integrate the
acquired companies or assets into our business.
If we are unable to retain our key employees or find, develop, and retain
service center managers, our business, financial condition, and results of
operations could be adversely affected.
We are highly dependent upon the services of several executive officers and
key management employees. The loss of any of their services could have a
short-term, negative impact our operations and profitability. We must continue
to develop and retain a core group of managers if we are to realize our goal of
expanding our operations and continuing our growth. Failing to develop and
retain a core group of managers could have a materially adverse effect on our
business. The Company has developed a structured business plan and procedures to
prevent a long-term effect on future profitability due to the loss of key
management employees.
We are highly dependent on a few major customers, the loss of one or more of
which could have a materially adverse effect on our business.
A significant portion of our revenue is generated from a limited number of
major customers. For the year ended December 31, 2005, our top 25 customers,
based on revenue, accounted for approximately 61% of our revenue. A reduction in
or termination of our services by one or more of our major customers could have
a materially adverse effect on our business and operating results.
Seasonality and the impact of weather affect our operations and profitability.
Our tractor productivity decreases during the winter season because
inclement weather impedes operations, and some shippers reduce their shipments
after the winter holiday season. Revenue can also be affected by bad weather and
holidays, since revenue is directly related to available working days of
shippers. At the same time, operating expenses increase and fuel efficiency
declines because of engine idling and harsh weather which creates higher
accident frequency, increased claims, and more equipment repairs. We can also
suffer short-term impacts from weather-related events such as hurricanes,
blizzards, ice storms, and floods that could harm our results or make our
results more volatile.
Ongoing insurance and claims expenses could significantly reduce our earnings.
Our future insurance and claims expense might exceed historical levels,
which could reduce our earnings. We self-insure for a portion of our claims
exposure resulting from workers' compensation, auto liability, general
liability, cargo and property damage claims, as well as employees' health
insurance. We also are responsible for our legal expenses relating to such
claims. We reserve currently for anticipated losses and expenses. We
periodically evaluate and adjust our claims reserves to reflect our experience.
However, ultimate results may differ from our estimates, which could result in
losses over our reserved amounts.
We maintain insurance above the amounts for which we self-insure with
licensed insurance carriers. Although we believe the aggregate insurance limits
should be sufficient to cover reasonably expected claims, it is possible that
one or more claims could exceed our aggregate coverage limits. Insurance
carriers have raised premiums for many businesses, including trucking companies.
As a result, our insurance and claims expense could increase, or we could raise
our self-insured retention when our policies are renewed. If these expenses
increase, or if we experience a claim in excess of our coverage limits, or we
experience a claim for which coverage is not provided, results of our operations
and financial condition could be materially and adversely affected.
We are dependent on computer and communications systems, and a systems failure
could cause a significant disruption to our business.
Our business depends on the efficient and uninterrupted operation of our
computer and communications hardware systems and infrastructure. We currently
use a centralized computer network and regular communication to achieve
system-wide load coordination. Our operations and those of our technology and
communications service providers are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure, terrorist attacks, Internet
failures, computer viruses, and other events beyond our control. In the event of
a significant system failure, our business could experience significant
disruption.
8
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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 land with 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. In the third quarter of 2005, the Company
announced the planned construction of a new corporate headquarters and shop
facility. The new site will be on 40 acres of land in North Liberty, Iowa which
is located on Interstate 380 and represents a centralized location along the
Cedar Rapids/Iowa City business corridor. The new facility will be funded with
proceeds from the sale of the current corporate headquarters and cash flows from
operations. The Company anticipates the facility being completed and ready for
occupancy in 2007.
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. The Company leases a facility in Phoenix, Arizona. In 2005, the
Company acquired fourteen acres of land in Phoenix, Arizona for the construction
of a new regional operating facility. Construction is scheduled to begin in 2006
and will be financed by cash flows from operations. A company-owned facility in
Dubois, Pennsylvania is being leased to an unrelated third party. The agreement
for the Dubois property is in the final year of a 10 year term with annual
minimum rentals of $240,000. The lessee has an obligation to purchase the
facility at the end of the lease term. A vacant, company-owned facility in
Columbus, Ohio is available for sale or rent.
ITEM 3. LEGAL PROCEEDINGS
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 2005, no matters were submitted to a vote of
security holders.
9
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 periods
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, 2004 to December 31, 2005. 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 2005
1st Quarter $ 23.11 $ 19.05 $.020
2nd Quarter 20.79 17.74 .020
3rd Quarter 21.74 18.78 .020
4th Quarter 22.18 18.75 .020
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
On January 31, 2006, the last reported sale price of our common stock on
the NASDAQ National Market was $23.29 per share.
The prices reported reflect interdealer quotations without retail mark-ups,
markdowns or commissions, and may not represent actual transactions. As of
January 25, 2006, the Company had 230 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 ten consecutive quarters. 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.
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 reflect the stock split for all periods presented.
Stock Repurchase
In September 2001, the Board of Directors approved the repurchase of up to
5.0 million shares of Heartland Express, Inc. common stock. During the year
ended December 31, 2005, 1.2 million shares were repurchased for $22.4 million
at approximately $19.02 per share and the shares were retired. The cost of such
shares purchased and retired in excess of their par value in the amount of
approximately $8.5 million was charged to additional paid-in capital, with the
remaining balance of approximately of $13.9 million charged to retained
earnings.
10
Stock Based Compensation
At December 31, 2005 the Company has a restricted stock award plan. In
2002, the Company's president transferred 136,125 shares to the plan on behalf
of key employees. The shares vest over a five year period or upon the death or
disability of the recipient. The plan shares are being amortized over the
five-year vesting period as compensation expense. Amortized compensation expense
of $363,568, $380,427, and $364,851 for the years ended December 31, 2005, 2004,
and 2003, respectively, is recorded in salaries, wages, and benefits on the
statement of income. The unamortized portion of the stock awards is recorded in
stockholders' equity as unearned compensation. All unvested shares are included
in the Company's 73.8 million outstanding shares. There are 50,850 unvested
shares as of December 31, 2005. The Company does not maintain a stock option
plan for the benefit of officers, employees, and directors.
11
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below is derived from
the Company's consolidated financial statements. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and notes thereto included in Item 8 of this Form 10-K.
Year Ended December 31,
(in thousands, except per share data)
2005 2004 2003 2002 2001
--------- ---------- ---------- ---------- ----------
Statements of Income Data:
Operating revenue $ 523,793 $ 457,086 $ 405,116 $ 340,745 $ 294,617
--------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages, and benefits 174,180 157,505 141,293 109,960 87,643
Rent and purchased transportation 29,635 36,757 49,988 64,159 65,912
Fuel 123,558 83,263 62,218 43,463 36,355
Operations and maintenance 14,955 12,939 13,298 12,872 11,548
Operating taxes and licenses 8,969 8,996 8,403 7,144 6,189
Insurance and claims 17,938 16,545 2,187 9,193 7,619
Communications and utilities 3,554 3,669 3,605 2,957 2,903
Depreciation 38,228 29,628 26,534 20,379 17,001
Other operating expenses, net 8,664 14,226 12,493 8,569 6,828
--------- ---------- ---------- ---------- ----------
419,681 363,528 320,019 278,696 241,998
--------- ---------- ---------- ---------- ----------
Operating income (2) 104,112 93,558 85,097 62,049 52,619
Interest income 7,373 3,071 2,046 2,811 4,435
--------- ---------- ---------- ---------- ----------
Income before income taxes 111,485 96,629 87,143 64,860 57,054
Income taxes 39,578 34,183 29,922 22,053 19,398
--------- ---------- ---------- ---------- ----------
Net income (2) $ 71,907 $ 62,446 $ 57,221 $ 42,807 $ 37,656
========= ========== ========== ========== ==========
Weighted average shares
outstanding (1) 74,344 75,000 75,000 75,000 75,000
========= ========== ========== ========== ==========
Earnings per share (1) (2) $ 0.97 $ 0.83 $ 0.76 $ 0.57 $ 0.50
========= ========== ========== ========== ==========
Dividends per share (1) $ 0.080 $ 0.067 $ 0.027 $ - $ -
========= ========== ========== ========== ==========
Balance Sheet data:
Net working capital $ 271,263 $ 242,472 $ 186,648 $ 146,297 $ 147,904
Total assets 573,508 517,012 448,407 373,108 314,238
Stockholders' equity 433,252 389,343 331,516 275,930 232,789
The Company had no long-term debt during any of the five years presented.
(1) Periods 2001 through 2004 have been adjusted to reflect the three-for-two
stock split.
(2) Effective July 1, 2005, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 153, "Exchanges of Non-monetary Assets--An
Amendment of Accounting Principles Board ("APB") Opinion No. 29, Accounting
for Non-monetary Transactions" ("SFAS 153"). The prospective application of
SFAS 153 after June 30, 2005 resulted in the recognition of gains from the
trade-in of revenue equipment which is offset by increased depreciation
(see note 2 of the notes to consolidated financial statements for further
discussion of SFAS 153). As a result of SFAS 153, operating income, net
income, and earnings per share during 2005 increased $6.1 million, $3.9
million, and $0.05, respectively.
12
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. The Company provides regional dry van
truckload services from eight regional operating centers plus its corporate
headquarters. The Company's eight regional operating centers accounted for 62.8%
of the 2005 operating revenues. The Company expanded to the Western United
States in the second quarter of 2005 with the opening of a regional operating
center in Phoenix, Arizona. 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 the availability of late-model equipment and experienced drivers.
Operating efficiencies and cost controls are achieved through equipment
utilization, operating a fleet of late model equipment, maintaining an industry
leading driver to non-driver employee ratio, and the effective management of
fixed and variable operating costs. At December 31, 2005, the Company's tractor
fleet had an average age of 1.5 years while the trailer fleet had an average age
of 3.2 years. The Company has grown internally by providing quality service to
targeted customers with a high density of freight in the Company's regional
operating areas. In addition to the development of its regional operating
centers, the Company has made five acquisitions since 1987. Future growth is
dependent upon several factors including the level of economic growth and the
related customer demand, the available capacity in the trucking industry,
potential of acquisition opportunities, and the availability of experienced
drivers.
The Company achieved record operating results during the year ended
December 31, 2005. The Company ended the year with operating revenues of $523.8
million, including fuel surcharges, net income of $71.9 million, and earnings
per share of $0.97 on average outstanding shares of 74.3 million. The Company
posted an 80.1% operating ratio (operating expenses as a percentage of operating
revenues) and a 13.7% net margin. The Company ended the year with cash, cash
equivalents, and short-term investments of $287.6 million and a debt-free
balance sheet. The Company has total assets of $573.5 million at December 31,
2005. The Company achieved a return on assets of 13.2% and a return on equity of
17.5%, both improvements over 2004. The Company's cash flow from operations for
the year of $104.9 million was 20.0% of operating revenues.
The Company hires only experienced drivers with safe driving records. In
order to attract and retain experienced drivers who understand the importance of
customer service, the Company increased pay for all drivers by $0.03 per mile
during both the first quarters of 2004 and 2005. Effective October 2, 2004, the
Company began paying all drivers an incremental amount for miles driven in the
upper Northeastern United States. The Company has solidified its position as an
industry leader in driver compensation with these aforementioned increases. The
Company is implementing additional driver pay increases in 2006 for selected
regional operations including a fleet-wide incentive to maintain a hazardous
materials endorsement on their commercial driver's license.
13
Results of Operations
The following table sets forth the percentage relationships of expense
items to total operating revenue for the years indicated.
Year Ended December 31,
----------------------------------
2005 2004 2003
-------- -------- --------
Operating revenue 100.0% 100.0% 100.0%
-------- -------- --------
Operating expenses:
Salaries, wages, and benefits 33.3% 34.4% 34.9%
Rent and purchased transportation 5.7 8.0 12.4
Fuel 23.6 18.2 15.4
Operations and maintenance 2.8 2.8 3.2
Operating taxes and license 1.7 2.0 2.1
Insurance and claims 3.4 3.6 0.5
Communications and utilities 0.7 0.8 0.9
Depreciation 7.3 6.5 6.5
Other operating expenses, net 1.6 3.2 3.1
-------- -------- ---------
80.1% 79.5% 79.0%
-------- -------- ---------
Operating income 19.9% 20.5% 21.0%
Interest income 1.4 0.7 0.5
-------- -------- ---------
Income before income taxes 21.3% 21.2% 21.5%
Income taxes 7.6 7.5 7.4
-------- -------- ---------
Net income 13.7% 13.7% 14.1%
======== ======== =========
Year Ended December 31, 2005 Compared With Year Ended December 31, 2004
Operating revenue increased $66.7 million (14.6%) to $523.8 million in 2005
from $457.1 million in 2004, as a result of the Company's expansion of its fleet
and customer base as well as improved freight rates and improved utilization of
fleet capacity. Operating revenue for both periods was positively impacted by
fuel surcharges assessed to the customer base. Fuel surcharge revenue increased
$31.2 million to $59.7 million from $28.5 million reported in 2004.
Salaries, wages, and benefits increased $16.7 million (10.6%), to $174.2
million in 2005 from $157.5 million in 2004. These increases were 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
Company increased driver pay by $0.03 per mile in the first quarter of 2005 for
the second consecutive year. During the fourth quarter of 2004, the Company
implemented additional mileage pay for miles driven in the Northeast corridor of
the United States. These increases to driver compensation resulted in a cost
increase of approximately $9.2 million in 2005. During 2005, employee drivers
accounted for 92% and independent contractors 8% of the total fleet miles,
compared with 88% and 12%, respectively, in 2004. Workers' compensation expense
decreased $4.0 million (53.0%) to $3.6 million in 2005 from $7.6 million in 2004
due to a decrease in frequency and severity of claims. Health insurance expense
increased $3.2 million (71.2%) to $7.7 million in 2005 from $4.5 million in 2004
due to an increase in frequency and severity of claims and increased reliance on
employee drivers. The Company plans to implement driver pay increases for select
operating regions in 2006. The Company's salaries, wages, and benefits will
increase accordingly in future periods.
Rent and purchased transportation decreased $7.2 million (19.4%), to $29.6
million in 2005 from $36.8 million in 2004. 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 stabilization. The Company increased the base mileage rate for
independent contractors by $0.03 per mile in the first quarter of 2005 for the
second consecutive year. During the fourth quarter of 2004, the Company
implemented additional mileage pay for miles driven in the Northeast corridor of
the United States. These increases resulted in additional cost of $0.8 million
in 2005.
Fuel increased $40.3 million (48.4%) to $123.6 million in 2005 from $83.3
million in 2004. The increase is the result of increased fuel prices, an
increased reliance on company-owned tractors, and a decrease in fuel economy
associated with the EPA-mandated clean air engines. The Company's fuel cost per
company-owned tractor mile increased 39.7% in 2005 compared to 2004. Fuel cost
per mile, net of fuel surcharge, increased 12.0% in 2005 compared to 2004. The
Company's fuel cost per gallon increased 34.5% in 2005 compared to 2004
14
primarily due to continued instability in the Middle East and severe hurricanes
in the Gulf Coast region. In addition, the fuel economy for tractors with the
EPA-mandated clean air engines decreased 7.3%. In 2005, tractors with the
EPA-mandated clean air engine accounted for 47.9% of the miles generated by the
company-owned fleet.
Operations and maintenance increased $2.0 million (15.6%) to $14.9 million
in 2005 from $12.9 million in 2004. The increase is primarily attributable to
the growth of the company-owned tractor and trailer fleets and the associated
costs to maintain revenue equipment.
Insurance and claims increased $1.4 million (8.4%), to $17.9 million in
2005 from $16.5 million in 2004 due to an increase in the frequency and severity
of claims.
Depreciation increased $8.6 million (29.0%), to $38.2 million in 2005 from
$29.6 million in 2004. The increase is due to growth of the Company-owned
tractor and trailer fleet, an increased cost of new tractors primarily
associated with the EPA-mandated clean air engines, and the implementation of
SFAS 153 (see note 2 of the notes to consolidated financial statements for
further discussion of SFAS 153). In future periods, we expect depreciation will
increase as we continue to upgrade our fleet in compliance with EPA-mandated
engine changes and due to the impact of SFAS 153.
Other operating expenses decreased $5.6 million (39.1%), to $8.6 million in
2005 from $14.2 million in 2004. Other operating expenses consist of costs
incurred for advertising expense, freight handling, highway tolls, driver
recruiting expenses, administrative costs, and gains on disposal of property and
equipment. During 2005, expenses related to freight handling and highway tolls
each increased $1.0 million. For the years ended December 31, 2005 and 2004,
gains on disposal of property and equipment of $8.0 million and $0.2 million,
respectively, are reflected as a reduction of other operating expenses. Included
are gains on trade-ins of revenue equipment of $6.5 million resulting from the
implementation of SFAS 153 (see note 2, of the notes to consolidated financial
statements for further discussion of SFAS 153) and a $1.2 million gain for the
sale of land at the corporate headquarters. We expect gains resulting from the
implementation of SFAS 153 to continue in future periods. The impact is
dependent upon market values of used revenue equipment at the time of trade-in.
Interest income increased $4.3 million (140.1%), to $7.4 million in 2005
from $3.1 million in 2004. The increase is the result of higher average balances
of cash, cash equivalents, and short-term investments and higher yields than
2004.
The Company's effective tax rate was 35.5% and 35.4% in 2005 and 2004,
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.
As a result of the foregoing, the Company's operating ratio (operating
expenses as a percentage of operating revenue) was 80.1% during the year ended
December 31, 2005 compared with 79.5% for 2004. Net income increased $9.5
million (15.2%), to $71.9 million for the year ended December 31, 2005 from
$62.4 million for the year ended December 31, 2004.
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 Company increased driver pay by $0.03 per mile in the first quarter of 2004.
In addition, the Company implemented additional mileage pay for miles driven in
the Northeast corridor of the United States. These increases to driver
compensation resulted in a cost increase of approximately $8.4 million. 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
15
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. The Company increased the base mileage rate for independent
contractors by $0.03 per mile in the first quarter of 2004. In addition, the
Company implemented additional mileage pay for miles driven in the Northeast
corridor of the United States. These two increases resulted in additional costs
of approximately $1.0 million.
Fuel increased $21.1 million (33.8%) to $83.3 million in 2004 from $62.2
million in 2003. The increase is the result of increased fuel prices, an
increased reliance on company-owned tractors, and a decrease in fuel economy
associated with the EPA-mandated clean air engines. The Company's fuel cost per
company-owned tractor mile increased 21.7% in 2004 compared to 2003. Fuel cost
per mile, net of fuel surcharge, increased 6.9% in 2004 compared to 2003. The
Company's fuel cost per gallon increased 20.4% in 2004 compared to 2003
primarily due to instability in the Middle East. In addition, the fuel economy
for tractors with the EPA-mandated clean air engines decreased 11.0%. In 2004,
tractors with the EPA-mandated clean air engine accounted for 11.6% of the miles
generated by the company-owned fleet.
Operations and maintenance decreased $0.4 million (2.7%) to $12.9 million
in 2004 from $13.3 million in 2003. The decrease is primarily related to a
reduction in repair costs due to the replacement of older model tractors and
trailers.
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 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 and trailers, 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. In conjunction with the growth in the company-owned tractor fleet, the
depreciation expense related to new tractors is higher than that associated with
the traded tractors because of the Company's 125% declining balance depreciation
method for tractors.
Other operating expenses increased $1.7 million (13.9%), to $14.2 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, administrative costs, and gains on disposal of property and
equipment. For the years ended December 31, 2004 and 2003, gains on disposal of
property and equipment of $174,831 and $45,782, respectively, are reflected as a
reduction of other operating expenses. 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.
Interest income increased $1.0 million (50.1%), to $3.1 million in 2004
from $2.1 million in 2003. The increase is the result of higher average balances
of cash, cash equivalents, and short-term investments and higher yields than
2003.
16
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.
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 2003, 2004, and 2005, thus
increasing our cost of operations. In addition to the increased fuel costs, the
reduced fuel efficiency of the new engines has 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.
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, 2005, was
net cash provided by operating activities of $104.9 million compared to $103.5
million in 2004. Cash flow from operating activities was 20.0% of operating
revenues in 2005 compared with 22.6% in 2004.
Capital expenditures for property and equipment, net of trade-ins, totaled
$49.2 million for the year during 2005 compared to $43.9 million during 2004. We
currently expect capital expenditures for revenue equipment, net of trades, to
be approximately $59.3 million in 2006. In addition, the Company expects to
begin construction of a new facility in Phoenix, Arizona in 2006. These
projected capital expenditures will be funded by cash flows from operations.
Land to be acquired in North Liberty, Iowa for the site of the Company's new
corporate headquarters facility will be funded by the proceeds from the sale of
land at the Company's present corporate headquarters location.
The Company paid cash dividends of $6.0 million in 2005 compared to $4.5
million in 2004. The Company began paying cash dividends in the third quarter of
2003. The Company declared a $1.5 million cash dividend in December 2005,
payable on January 3, 2006.
The Company paid income taxes of $42.1 million in 2005 compared to $30.5
million in 2004. The increase is primarily attributable to an increase in
taxable income relating to lower tax depreciation due to the bonus depreciation
provision that expired on December 31, 2004.
During the year ended December 31, 2005, 1.2 million shares of the
Company's common stock were repurchased for $22.4 million at approximately
$19.02 per share. The repurchased shares were subsequently retired. At December
31, 2005, the Company has 3.8 million shares remaining under the current Board
of Director repurchase authorization. Future purchases are dependent upon market
conditions.
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 short-term
investments. The Company ended the year with $287.6 million in cash, cash
equivalents, and short-term investments and no debt. Net working capital for the
year ended December 31, 2005 increased by $28.8 million over 2004. The
improvement in net working capital helped mitigate the additional cash
17
expenditure for income taxes and stock repurchases during 2005. Based on the
Company's strong financial position, management believes outside financing could
be obtained, if necessary, to fund capital expenditures.
Off-Balance Sheet Transactions
The Company's liquidity is not materially affected by off-balance sheet
transactions.
Contractual Obligations and Commercial Commitments
The following sets forth our contractual obligations and commercial
commitments at December 31, 2005. As of December 31, 2005 the Company has no
debt outstanding.
Payments due by period
----------- ---------------- ----------- -----------
Contractual Obligations Total Less than 1 year 1 - 3 years 3 - 5 years
----------- ---------------- ----------- -----------
Purchase Obligation (1) $46,805,000 $46,805,000 $ -- $ --
Operating Lease Obligations (2) $ 1,517,750 $ 385,415 $ 662,830 $ 469,505
Standby letters of credit (3) $ 2,260,000 $ 2,260,000 $ -- $ --
----------- ---------------- ----------- -----------
Total $50,582,750 $49,450,415 $ 662,830 $ 469,505
=========== ================ =========== ===========
(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
short-term investment balances, and with cash flows from operations.
(2) The operating lease obligations include the rental of facilities at
the Company's corporate headquarters. This lease expires May 31, 2010
and contains a five-year renewal option. In 2005, the Company
announced the construction of a new corporate headquarters which is
expected to be ready for occupancy in 2007. The lease will be
cancelled upon the occupancy of the new corporate headquarters and
shop facility. The operating lease obligations also include the lease
of a terminal space in Phoenix, Arizona. This lease expires June 30,
2006 and contains two one-year renewal options.
(3) The standby letters of credit are primarily required for
self-insurance purposes. There are no outstanding balances as of
December 31, 2005.
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 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.
18
* 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.
* Management judgment is required to determine the provision for income
taxes and to determine whether deferred income taxes will be realized.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which the
temporary differences are expected to be recovered or settled. A
valuation allowance is required to be established for the amount of
deferred assets that are determined not to be realizable. A valuation
allowance for deferred income tax assets has not been established due
to the profitability of the Company's business.
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.
New Accounting Pronouncements
See Note 1 of the consolidated financial statements for a full description
of recent accounting pronouncements and the respective 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, 2005 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, 2005 and therefore,
has no market risk related to debt.
As of December 31, 2005, the Company has no derivative financial
instruments to reduce its exposure to diesel fuel price fluctuations.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Heartland Express, Inc.:
We have audited the accompanying consolidated balance sheets of Heartland
Express, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2005. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedule (as listed in Part IV, Item
15(a)(2) herein). 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, 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.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 153,
Exchanges of Nonmonetary Assets--an amendment of APB Opinion No. 29, on July 1,
2005.
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, 2005, 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 March 8, 2006, expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
Des Moines, Iowa
March 8, 2006
20
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2005 2004
------------- -------------
CURRENT ASSETS
Cash and cash equivalents ................... $ 5,366,929 $ 1,610,543
Short-term investments ...................... 282,255,377 256,727,782
Trade receivables,
net of allowance for doubtful
accounts of ............................... 42,860,411 37,102,813
Prepaid tires and tubes ..................... 3,998,430 2,692,090
Other prepaid expenses ...................... 304,667 158,267
Deferred income taxes ....................... 28,721,000 24,964,000
------------- -------------
Total current assets ..................... 363,506,814 323,255,495
------------- -------------
PROPERTY AND EQUIPMENT
Land and land improvements .................. 10,643,135 9,543,953
Buildings ................................... 16,925,821 17,494,255
Furniture and fixtures ...................... 1,042,131 1,210,424
Shop and service equipment .................. 2,620,031 2,557,654
Revenue equipment ........................... 250,479,838 222,842,499
------------- -------------
281,710,956 253,648,785
Less accumulated depreciation ............... 81,204,416 68,973,751
------------- -------------
Property and equipment, net ................. 200,506,540 184,675,034
------------- -------------
GOODWILL ....................................... 4,814,597 4,814,597
OTHER ASSETS ................................... 4,679,974 4,266,725
------------- -------------
$ 573,507,925 $ 517,011,851
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities .... $ 10,572,525 $ 9,722,099
Compensation and benefits ................... 12,629,831 11,151,523
Income taxes payable ........................ 8,064,947 7,918,914
Insurance accruals .......................... 53,631,471 45,995,442
Other accruals .............................. 7,345,499 5,995,943
------------- -------------
Total current liabilities ................ 92,244,273 80,783,921
------------- -------------
DEFERRED INCOME TAXES .......................... 48,012,000 46,885,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01; authorized
5,000,000 shares; none issue .............. -- --
Common stock, par value $.01; authorized
395,000,000 shares; issued and
outstanding: 73,821,500 in 2005 and
75,000,000 in 2004 ........................ 738,215 750,000
Additional paid-in capital .................. -- 8,510,305
Retained earnings ........................... 432,952,138 380,906,884
------------- -------------
433,690,353 390,167,189
Less unearned compensation .................. (438,701) (824,259)
------------- -------------
433,251,652 389,342,930
------------- -------------
$ 573,507,925 $ 517,011,851
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
21
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2005 2004 2003
------------- ------------ ------------
Operating revenue .................. $523,792,747 $457,086,311 $405,116,097
------------ ------------ ------------
Operating expenses:
Salaries, wages, and benefits ... 174,180,078 157,505,082 141,292,791
Rent and purchased transportation 29,634,982 36,757,494 49,988,074
Fuel ............................ 123,557,662 83,262,814 62,218,497
Operations and maintenance ...... 14,955,409 12,939,410 13,297,735
Operating taxes and licenses .... 8,968,439 8,996,380 8,402,986
Insurance and claims ............ 17,938,170 16,544,050 2,187,537
Communications and utilities .... 3,554,328 3,668,494 3,604,661
Depreciation .................... 38,228,334 29,628,157 26,533,937
Other operating expenses, net ... 8,664,033 14,226,244 12,492,870
------------ ------------ ------------
419,681,435 363,528,125 320,019,088
------------ ------------ ------------
Operating income ................ 104,111,312 93,558,186 85,097,009
Interest income .................... 7,372,543 3,070,956 2,045,793
------------ ------------ ------------
Income before income taxes ...... 111,483,855 96,629,142 87,142,802
Income taxes ....................... 39,578,093 34,182,554 29,921,477
------------ ------------ ------------
Net income ...................... $ 71,905,762 $ 62,446,588 $ 57,221,325
============ ============ ============
Earnings per share ................. $ 0.97 $ 0.83 $ 0.76
============ ============ ============
Weighted average shares outstanding 74,343,969 75,000,000 75,000,000
============ ============ ============
Dividends declared per share ....... $ 0.080 $ 0.067 $ 0.027
============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
22
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, 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 .......... -- (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 ......................... 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
Net income .......................... -- -- 71,905,762 -- 71,905,762
Dividends on common stock, $0.080
per share ........................ -- -- (5,941,459) -- (5,941,459)
Stock repurchase .................... (11,785) (8,492,713) (13,914,651) -- (22,419,149)
Forfeiture of stock awards .......... -- (17,592) (4,398) 21,990 --
Amortization of unearned compensation -- -- -- 363,568 363,568
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2005 .......... $ 738,215 $ -- $ 432,952,138 $ (438,701) $ 433,251,652
============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
23
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------------
2005 2004 2003
------------- -------------- -------------
OPERATING ACTIVITIES
Net income ...................................... $ 71,905,762 $ 62,446,588 $ 57,221,325
Adjustments to reconcile to net cash provided
by operating activities:
Depreciation and amortization ................ 38,248,363 29,648,161 26,553,933
Deferred income taxes ........................ (2,630,000) 3,469,000 9,497,000
Amortization of unearned compensation ........ 363,568 380,427 364,851
Gain on disposal of property and equipment ... (8,031,915) (174,831) (45,782)
Changes in certain working capital items:
Trade receivables .......................... (5,757,598) (266,085) (3,824,334)
Prepaid expenses ........................... (611,060) 186,004 2,175,513
Accounts payable, accrued liabilities,
and accrued expenses ..................... 11,308,110 7,631,300 3,491,247
Accrued income taxes ....................... 146,033 198,039 1,650,557
------------- ------------- -------------
Net cash provided by operating activities ....... 104,941,263 103,518,603 97,084,310
------------- ------------- -------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment .... 2,309,539 956,731 173,624
Purchases of property and equipment,
net of trades ................................ (49,155,034) (43,899,131) (47,062,344)
Net purchases of municipal bonds ................ (25,527,595) (92,915,057) (24,758,061)
Change in other assets .......................... (433,253) (173,140) (627,597)
------------- ------------- -------------
Net cash used in investing activities ........... (72,806,343) (136,030,597) (72,274,378)
------------- ------------- -------------
FINANCING ACTIVITIES
Cash dividend ................................ (5,959,385) (4,495,893) (998,260)
Stock repurchase ............................. (22,419,149) -- --
------------- ------------- -------------
Net cash used in financing actitvities ....... (28,378,534) (4,495,893) (998,260)
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents ............................. 3,756,386 (37,007,887) 23,811,672
CASH AND CASH EQUIVALENTS
Beginning of year ............................... 1,610,543 38,618,430 14,806,758
------------- ------------- -------------
End of year ..................................... $ 5,366,929 $ 1,610,543 $ 38,618,430
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes ................................. $ 42,061,960 $ 30,515,515 $ 18,773,920
Noncash investing activities:
Book value of revenue equipment traded ....... $ 27,758,365 $ 20,379,184 $ 2,338,332
The accompanying notes are an integral part of these consolidated financial
statements.
24
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. In 2005, the Company expanded to the Western United States with the
opening of a terminal in Phoenix, Arizona. 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. Restricted and designated cash and short-term investments totaling $4.7
million in 2005 and $4.2 million in 2004 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.
Short-term 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. The cost approximates
fair value due to the nature of the investment. 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.
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 day 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.
25
Property, Equipment, and Depreciation:
Property and equipment are stated at cost, while maintenance and repairs
are charged to operations as incurred. In December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 153, "Exchanges of Non-monetary Assets--an amendment of
Accounting Principles Board ("APB") Opinion No. 29, Accounting for Non-monetary
Transactions" ("SFAS 153"). See note 2 for details of this adopted accounting
pronouncement and its impact on property, equipment, and depreciation.
For presentation purposes gains on disposals of property and equipment are
recorded as an offset against other operating expenses. For the years ended
December 31, 2005, 2004, and 2003 other operating expenses include gains on
disposals of property and equipment of $8.0 million, $174,831, and $45,782,
respectively.
Depreciation for financial statement purposes is computed by the
straight-line method for all assets other than tractors. Tractors are
depreciated by the 125% declining balance method. Tractors are depreciated to
salvage values of $15,000 while trailers are depreciated to salvage values of
$4,000.
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
Advertising Costs:
The Company expenses all advertising costs as incurred. Advertising costs
are included in other operating expenses in the consolidated statements of
income.
Goodwill:
Goodwill is tested at least annually for impairment by applying a fair
value based analysis. Management determined that no impairment charge was
required for the years ended December 31, 2005, 2004, and 2003.
Earnings Per Share:
Earnings per share are based upon the weighted average common shares
outstanding during each year. The Company has no common stock equivalents;
therefore, diluted earnings per share are equal to basic earnings per share. All
earnings per share data presented reflect the three-for-two stock split on
August 20, 2004.
Insurance and Claims accruals:
Insurance accruals reflect the estimated cost for auto liability, 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 income.
Impairment of Long-Lived Assets:
The Company periodically evaluates property and equipment for impairment
upon the occurrence of events or changes in circumstances that indicate the
carrying amount of assets may not be recoverable. There were no impairment
charges recognized during the years ended December 31, 2005, 2004, and 2003.
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 statements
carrying amount of existing assets and liabilities and their respective tax
26
basis. 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 Pronouncement:
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), a revision of SFAS No. 123, "Accounting for Stock Based
Compensation". SFAS 123R 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 income based on
their fair value. SFAS 123R also requires entities to estimate the number of
forfeitures expected to occur and record expense based upon the number of awards
expected to vest. The adoption of SFAS 123R, which will be effective for the
Company on January 1, 2006, will not have a material impact on the Company.
Reclassifications:
Certain reclassifications have been made to prior year financial statements
to conform to the December 31, 2005 presentation.
2. Adopted Accounting Pronouncement
In December 2004, FASB issued SFAS 153 as discussed in Note 1. 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. The
Company routinely trades revenue equipment, which is considered a non-monetary
transaction. Gains from the trade-ins of revenue equipment were previously
deferred and presented as a reduction of the depreciable basis of the new
revenue equipment pursuant to APB Opinion No. 29. Effective after June 30, 2005,
such gains are presented in the statement of income as a reduction of other
operating expenses pursuant to SFAS 153. For the year ended December 31, 2005,
the implementation of SFAS 153 resulted in gains from the trade-in of revenue
equipment of $6.5 million. As a result of the higher depreciable basis,
depreciation expense increased approximately $369,000 during the six months
ended December 31, 2005 and depreciation expense will continue to be higher over
the useful life of the revenue equipment obtained from trade-ins.
3. 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 32%
for the year ended December 31, 2005 and 33% the years ended December 31, 2004
and 2003, respectively. Operating revenue from one customer exceeded 10% of
total gross revenues in 2005, 2004, and 2003. Annual revenues for this customer
were $66.2 million, $62.7 million, and $53.3 million for the years ended
December 31, 2005, 2004, and 2003, respectively.
27
4. 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.
Deferred tax assets and liabilities as of December 31 are as follows:
2005 2004
------------ ------------
Deferred income tax liabilities,
related to property and equipment $ 48,012,000 $ 46,885,000
============ ============
Deferred income tax assets:
Allowance for doubtful accounts $ 306,000 $ 306,000
Accrued expenses 6,436,000 5,872,000
Insurance accruals 21,143,000 17,359,000
Other 836,000 1,427,000
------------ ------------
Deferred income tax assets $ 28,721,000 $ 24,964,000
============ ============
The income tax provision is as follows:
2005 2004 2003
------------ ------------ ------------
Current income taxes:
Federal $ 37,708,855 $ 27,905,357 $ 18,853,846
State 4,499,238 2,808,197 1,570,631
------------ ------------ ------------
42,208,093 30,713,554 20,424,477
------------ ------------ ------------
Deferred income taxes:
Federal (1,825,000) 4,180,401 9,403,000
State (805,000) (711,401) 94,000
------------ ------------ ------------
(2,630,000) 3,469,000 9,497,000
------------ ------------ ------------
Total $ 39,578,093 $ 34,182,554 $ 29,921,477
============ ============ ============
The income tax provision differs from the amount determined by applying the
U.S. federal tax rate as follows:
2005 2004 2003
------------ ------------ ------------
Federal tax at statutory rate (35%) $ 39,019,349 $ 33,820,200 $ 30,499,981
State taxes, net of federal benefit 2,401,000 1,363,000 1,082,000
Non-taxable interest income (2,540,000) (1,045,000) (675,000)
Other 697,744 44,354 (985,504)
------------ ------------ ------------
$ 39,578,093 $ 34,182,554 $ 29,921,477
============ ============ ============
The Company has not recorded a valuation allowance. In management's
opinion, it is more likely than not that the Company will be able to utilize its
deferred tax assets in future periods.
5. 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 $27,618 plus the
payment of all property taxes, insurance and maintenance. The lease was renewed
for a five year term on June 1, 2005 increasing the monthly rental from $24,969
to $27,618. In the opinion of management, the rates paid are comparable to those
that could be negotiated with a third party.
28
The total minimum rental commitment under the building lease is as follows:
Year ending December 31:
2006 $ 331,415
2007 331,415
2008 331,415
2009 331,415
2010 138,090
---------
$1,463,750
==========
Rent expense paid to the Company's president totaled $318,169 for the year
ended December 31, 2005, and $299,625 for the years ended December 31, 2004, and
2003. In 2005, the Company announced the construction of a new corporate
headquarters which is expected to be ready for occupancy in 2007. The lease will
be cancelled upon the occupancy of the new corporate headquarters and shop
facility.
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.
6. Accident and Workers' Compensation Insurance Liabilities
The Company acts as a self-insurer for auto liability involving property
damage, personal injury, or cargo up to $1.0 million for any individual claim.
In addition, the Company is responsible for $2.0 million in the aggregate for
all claims in excess of $1.0 million and below $2.0 million. Liabilities in
excess of these amounts are assumed by an insurance company up to $50.0 million.
The Company increased the retention amount from $500,000 to $1.0 million for
each claim effective April 1, 2003.
The Company acts as a self-insurer for workers' compensation liability up
to $1.0 million for any individual claim. The Company increased the retention
amount from $500,000 to $1.0 million effective April 1, 2005. Liabilities in
excess of this amount are 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 $2.3 million 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.
Accident and workers' compensation accruals 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.
7. Stockholders' Equity
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 25.0 million 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, 2005 and 2004, and in
all the per share data in the accompanying consolidated financial statements,
notes to consolidated 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. In
29
2005, 1.2 million shares were repurchased and retired. No shares were purchased
during 2004, and 2003. The authorization to repurchase remains open at December
31, 2005 and has no expiration date.
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. Compensation expense of approximately $364,000, $380,000,
and $365,000 was recognized for the years ended December 31, 2005, 2004, and
2003, respectively. The original value of forfeited shares is treated as a
reduction of additional paid in capital and unearned compensation in the
consolidated statements of shareholders' equity. There were 1,500 shares
forfeited during the year ended December 31, 2005. There were no shares
forfeited in 2004 and 6,375 shares forfeited in 2003.
8. 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
$1,096,000, $1,091,000, and $824,000, for the years ended December 31, 2005,
2004, and 2003, respectively.
9. Commitments and Contingencies
As of December 31, 2005, the Company had purchase commitments for
additional tractors with an estimated purchase price of $46.8 million, net of
trade-ins, for delivery throughout 2006. Although the Company expects to take
delivery of this revenue equipment, delays in the availability of equipment
could occur due to factors beyond the Company's control.
The Company is a party to ordinary, routine litigation and administrative
proceedings incidental to its business. In the opinion of management, the
Company's potential exposure under pending legal proceedings is adequately
provided for in the accompanying financial statements.
30
10. Quarterly Financial Information (Unaudited)
First Second Third Fourth
-------- --------- --------- ---------
(In Thousands, Except Per Share Data)
Year ended December 31, 2005
Operating revenue $ 118,677 $ 128,851 $ 136,210 $ 140,054
Operating income 22,066 25,281 25,332 31,432
Income before income taxes 23,402 27,333 27,198 33,552
Net income 15,094 17,630 17,542 21,639
Earnings per share 0.20 0.24 0.24 0.29
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
Earnings per share (1) 0.18 0.21 0.23 0.22
(1) The above earnings per share data reflect 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, 2005 $775,000 $ 84,026 $ - $ 84,026 $775,000
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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCOSURE
None.
31
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures - The Company 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.
Based on their evaluation as of December 31, 2005, 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 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 Securities and Exchange Commission (the "SEC")
rules and forms.
Management's Report on Internal Control Over Financial Reporting - The
Company's 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) of the Exchange Act. 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 as of December 31, 2005.
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, 2005. Our management's assessment of
the effectiveness of our internal control over financial reporting as of
December 31, 2005 has been audited by KPMG LLP, an independent registered public
accounting firm, as stated in their report set forth below.
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, 2005, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
32
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Heartland Express, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting under Item 9A,
that Heartland Express, Inc. and subsidiaries (the Company) maintained effective
internal control over financial reporting as of December 31, 2005, 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.
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, 2005, 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, 2005, 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, 2005 and 2004, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2005,
and our report dated March 8, 2006 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Des Moines, Iowa
March 8, 2006
33
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 11, 2006. Such
information is incorporated herein by reference.
Code of Ethics
The Company has adopted a code of ethics known as the "Code of Business
Conduct and Ethics" that applies to the Company's employees including the
principal executive officer, principal financial officer, and controller. In
addition, the Company has adopted a code of ethics known as "Code of Ethics for
Senior Financial Officers". The Company makes these codes available on its
website at www.heatlandexpress.com (and in print to any shareholder who requests
them).
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 11, 2006. 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 11, 2006. 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 11,
2006. Such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 of Part III is presented under
"Principal Accounting Fees and Services" in the Company's Definitive Proxy
Statement for the Annual Meeting of Stockholders on May 11, 2006. Such
information is incorporated herein by reference.
34
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements and Schedules.
Page
Report of Independent Registered Public Accounting Firm KPMG LLP........ 20
Consolidated Balance Sheets............................................. 21
Consolidated Statements of Income....................................... 22
Consolidated Statements of Stockholders' Equity......................... 23
Consolidated Statements of Cash Flows................................... 24
Notes to Consolidated Financial Statements.............................. 25-31
(a)(2) Financial Statements Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves............ 31
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 to Incorporated by reference
Articles of Incorporation to 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.
35
4.3 Certificate of Amendment to Incorporated by reference
Articles of Incorporation to 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
June 6, 1997 between Larry to the Company's Form 10-K
Crouse, as trustee under the for the year ended December
Gerdin Educational Trusts, and 31, 1997. Commission file
Larry Crouse, voting trustee. no. 0-15087.
10.1 Business Property Lease between Incorporated by reference
Russell A. Gerdin as Lessor and to the Company'sForm 10-Q
the Companyas Lessee, regarding for the quarter ended,
the Company'sheadquarters at September 30, 2005.
2777 Heartland Drive,Coralville, Commission file no.0-15087.
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.
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 Executive Filed herewith.
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.
36
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: March 8, 2006 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 Chief
--------------------- Executive Officer and Secretary,
Russell A. Gerdin (Principal executive officer) March 8, 2006
/s/ John P. Cosaert Executive Vice President of Finance,
------------------- Chief Financial Officer and Treasurer
John P. Cosaert (Principal accounting and financial
officer) March 8, 2006
/s/ Richard O. Jacobson Director March 8, 2006
-----------------------
Richard O. Jacobson
/s/ Michael J. Gerdin Vice President of Regional
--------------------- Operations and Director March 8, 2006
Michael J. Gerdin
/s/ Benjamin J. Allen Director March 8, 2006
---------------------
Benjamin J. Allen
/s/ Lawrence D. Crouse Director March 8, 2006
----------------------
Lawrence D. Crouse
37
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
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: March 8, 2006
By: /s/ Russell A. Gerdin
Russell A. Gerdin
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
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: March 8, 2006
By: /s/ John P. Cosaert
---------------------
John P. Cosaert
Executive Vice President-Finance
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
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, 2005, 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: March 8, 2006 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, 2005, 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: March 8, 2006 By: /s/ John P. Cosaert
--------------------
John P. Cosaert
Executive Vice President
And Chief Financial Officer
END OF REPORT