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, 2008
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 of (I.R.S. Employer Identification No.)
Incorporation or organization)
901 North Kansas Avenue, North Liberty, Iowa 52317
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 319-626-3600
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 Stock Market LLC
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 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 large accelerated filer, an
accelerated filer, or a non-accelerated filer. (See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act). Large
accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
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, 2008 was $832.9 million. As of February 20, 2009 there
were 92,411,781 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 7, 2009 are incorporated by reference in Part III of this report.
TABLE OF CONTENTS
Page
Part I
Item 1. Business 1
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 11
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for the Registrant's Common Equity,
Related Stockholder Matters, and Issuer
Purchases of Equity Securities 12
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 26
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure 27
Item 9A. Controls and Procedures 28
Item 9B. Other Information 30
Part III
Item 10. Directors, Executive Officers, and Corporate Governance 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters 30
Item 13. Certain Relationships and Related
Transactions, and Director Independence 30
Item 14. Principal Accounting Fees and Services 30
Part IV
Item 15. Exhibits, Financial Statement Schedule 31
Signatures 33
FORWARD LOOKING STATEMENTS
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, and such statements are subject to the safe harbor created by such
sections. 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.
All such forward-looking statements speak only as of the date of this Annual
Report. You are cautioned not to place undue reliance on such forward-looking
statements. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in the events, conditions, or circumstances on which any
such statement is based.
PART I
ITEM 1. BUSINESS
General
Heartland Express, Inc. ("Heartland" or the "Company") is a short-to-medium haul
truckload carrier with corporate headquarters in North Liberty, Iowa and
operating regional terminal locations in nine states outside of Iowa. The
Company provides regional dry van truckload services from its nine regional
operating centers plus its corporate headquarters. The Company transports
freight for major shippers and generally earns revenue based on the number of
miles per load delivered. 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 and complemented this expansion into the Western United
States with the purchase of a terminal location near Dallas, Texas during the
third quarter of 2008. The keys to maintaining a high level of service are the
availability of late-model equipment and experienced drivers. 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 twenty-two years from 1986 to 2008, Heartland has grown
to $625.6 million in revenue from $21.6 million and net income has increased to
$70.0 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 and profits for the past three years can be found in our
"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. 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 Express Services,
Inc., Heartland Express Maintenance Services, 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
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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, on-time service, equipment utilization, driver
time at home, operational efficiency, and equipment maintenance needs.
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 (514 miles average length of haul in
2008) 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 operates nine specialized regional distribution operations in Atlanta,
Georgia; Carlisle, Pennsylvania; Chester, Virginia; Columbus, Ohio;
Jacksonville, Florida; Kingsport, Tennessee; Olive Branch, Mississippi; Phoenix,
Arizona and Seagoville, Texas (opened in January 2009) in addition to operations
at our corporate headquarters. 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. Management
believes Heartland's reputation for quality service, reliable equipment, and
equipment availability makes it a core carrier for many of its customers. As a
testament to the Company's premium service, the Company received nineteen
customer service awards in addition to receiving the dry van Quest for Quality
award from Logistics Management during 2008.
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 70%, 51%, and 36% of
gross revenue, respectively, in 2008. 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 approximately 12%
of revenue in 2008. No other customer accounted for as much as ten percent of
revenue. One customer accounted for 13% of revenue in 2007 with no other
customers accounting 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.
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Drivers, Independent Contractors, and Other Employees
Heartland relies on its workforce in achieving its business objectives. As of
December 31, 2008, Heartland employed 3,279 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. For the year ended December 31, 2008 owner
operators accounted for approximately 4% of the Company's total miles.
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. In the
second half of 2008, the Company began a partial tractor fleet upgrade with
trucks manufactured by Navistar International Corporation. As of December 31,
2008, the Company was approximately 36% complete with this upgrade campaign. The
Company currently expects to complete this campaign during the fourth quarter of
2009. Also during 2008 the Company acquired 400 new Wabash National Corporation
trailers. At December 31, 2008, primarily all the Company's tractors are
manufactured by Navistar International Corporation. Primarily all of the
Company's trailers are manufactured by Wabash National Corporation. The Company
operates the majority of 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 requirements
have been/will be implemented in multiple phases starting in 2002 and require
progressively more restrictive emission requirements through 2010. Beginning in
January 2007, all newly manufactured truck engines must comply with a new set of
more restrictive engine emission requirements. Compliance with the new emission
standards have resulted in a significant increase in the cost of new tractors,
lower fuel efficiency, and higher maintenance costs. Prior to the new engine
emission requirements that became effective January 1, 2007, the Company
completed a fleet upgrade of tractors with pre-January 2007 engine requirements.
The Company did not purchase a significant amount of tractors during 2007 and
during 2008 has begun a fleet upgrade as discussed above. As of December 31,
2007, 100% of the Company's tractor fleet were models with pre-January 2007
engine requirements and as of December 31, 2008, approximately 19% of the
Company's tractor fleet are tractors containing engines meeting post-January
2007 requirements. The Company has experienced an approximately 17% increase in
the price of post-January 2007 engine tractors compared to pre-January 2007
engine tractors. Beginning in 2010 a new set of more restrictive engine emission
requirements will become effective. The inability to recover tractor cost
increases, as a result of new engine emission requirements, with rate increases
or cost reduction efforts could adversely affect the Company's results of
operations.
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Fuel
The Company purchases over-the-road fuel through a network of fuel stops
throughout the United States at which the Company has negotiated price
discounts. In addition, bulk fuel sites are maintained at twelve Company owned
locations which includes the nine regional operating centers, the Company's
corporate headquarters, plus two service terminal locations in order to take
advantage of volume pricing. Both above ground 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. For the years ended
December 31, 2008, 2007, and 2006, fuel expense, net of fuel surcharge revenue,
was $79.4 million, $81.9 million, and $69.5 million or 19.7%, 20.5% and 18.7%,
respectively, of the Company's total operating expenses, net of fuel surcharge.
During periods of rapidly rising fuel prices, fuel surcharge agreements do not
cover 100% of the Company's fuel expense. During 2008 fuel prices rose rapidly
during the first half of the year and declined rapidly over the second half of
the year negating the volatile fluctuation in fuel prices during the year. At
the peak of the fuel prices in July 2008, fuel expense, net of fuel surcharge
revenue, was approximately 23% of the Company's total operating expenses, net of
fuel surcharge. Fuel consumed by empty and out-of-route miles and by truck
engine idling time is not recoverable and therefore any increases or decreases
in fuel prices related to empty and out-of-route miles and idling time will
directly impact the Company's operating results.
Subsequent to December 31, 2008 the Company has contracted with an unrelated
third party to hedge forecasted future cash flows related to fuel purchases
associated with fuel consumption not covered by fuel surcharge agreements. The
hedged forecasted future cash flows was transacted through the use of certain
swap investments. The Company has implemented the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", ("SFAS 133"), and has designated such hedges as cash
flow hedges. Under the guidance of SFAS 133, the Company will record an asset or
liability for the fair value of the hedging instrument each reporting period
with the change in the effective portion of the hedging instrument (as defined
by SFAS 133) included in other comprehensive income (loss) and any ineffective
portion of the hedging instrument (as defined by SFAS 133) recognized in the
statement of income as a component of fuel expense. The hedging strategy was
implemented mainly to reduce the Company's exposure to significant upward
movements in diesel fuel prices related to fuel consumed by empty and
out-of-route miles and truck engine idling time which is not currently
recoverable through fuel surcharge agreements.
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. As the general economic conditions and credit market conditions
deteriorated throughout 2008, the industry became extremely competitive based on
freight rates mainly due to excess capacity compared to current freight volumes.
We do not expect freight volumes to improve in the near term. The Company
believes it 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.
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, is evaluated on an annual basis. The Company actively participates in
the settlement of each claim incurred.
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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 covered through insurance policies.
The Company retains 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. All liabilities in excess of $1.0 million are covered through
insurance policies. 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 DOT, through the Federal Motor Carrier Safety Administration ("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 "2005 Rules"). In July 2007, a federal
appeals court vacated portions of the 2005 Rules. Two of the key portions that
were vacated include the expansion of the driving day from 10 hours to 11 hours,
and the "34-hour restart," which allowed drivers to restart calculations of the
weekly on-duty time limits after the driver had at least 34 consecutive hours
off duty. The court indicated that, in addition to other reasons, it vacated
these two portions of the 2005 Rules because FMCSA failed to provide adequate
data supporting its decision to increase the driving day and provide for the
34-hour restart. In November 2008, following the submission of additional data
by FMCSA and a series of appeals and related court rulings, FMCSA published its
final rule, which retains the 11 hour driving day and the 34-hour restart.
However, advocacy groups may continue to challenge the final rule. We are unable
to predict how a court may rule on such challenges and to what extent the new
presidential administration may become involved in this issue. On the whole,
however, we believe a court's decision to strike down the final rule would
decrease productivity and cause some loss of efficiency, as drivers and shippers
may need to be retrained, computer programming may require modifications,
additional drivers may need to be employed or engaged, additional equipment may
need to be acquired, and some shipping lanes may need to be reconfigured. We are
also unable to predict the effect of any new rules that might be proposed if the
final rule is stricken by a court, but any such proposed rules could increase
costs in our industry or decrease productivity.
During 2008, the DOT issued a rule that now includes tractor onboard position
history as part of supporting documentation in DOT audits and inquiries.
Further, the new rule requires the Company to maintain six months of tractor
onboard position history. The Company may also become subject to new or more
restrictive regulations relating to matters such as fuel emissions and
ergonomics. 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. 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
5
any material filed by the Company with the SEC at the SEC's Public Reference
Room at 100 F Street NE, 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. Information on the Company's
website is not incorporated by reference into this annual report on Form 10-K.
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 discussion of risk factors contains
forward-looking statements as discussed in Item 1 above.
Our business is subject to general economic and business factors that are
largely out of our control, any of which could have a materially adverse effect
on our operating results.
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 subject to factors within the capital markets that may affect our
short-term liquidity. All of our long-term investments as of December 31, 2008
were in tax free; auction rate student loan educational bonds backed by the U.S.
government. The investments typically have an interest reset provision of 35
days with contractual maturities that range from 5 to 38 years as of December
31, 2008. At the reset date we historically had the option to roll the
investments and reset the interest rate or sell the investments in an auction.
We historically received the par value of the investment plus accrued interest
on reset date if the underlying investment was sold. Primarily all long term
investments held by us (96.1% of par value) have AAA (or equivalent) ratings
from recognized rating agencies. We only hold senior positions of underlying
securities. We have not invested in asset backed securities and do not have
direct securitized sub-prime mortgage loans exposure or loans to, commitments
in, or investments in sub-prime lenders. When we elect to participate in an
auction and therefore sell investments, there is no guarantee that a willing
buyer will purchase the security resulting in us receiving cash upon the
election to sell. During the quarter ended March 31, 2008 we began experiencing
failures in the auction process of auction rate securities that we held, as
further described below in the risk factor "If the estimated fair value of
auction rate securities continue to remain below cost or if the fair value
decreases significantly from the current fair value, we may be required to
record an impairment of these investments, through a charge in the consolidated
statement of income, which could have a materially adverse effect on our
earnings."
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, fuel prices,
taxes, tolls, license and registration fees, insurance costs, cost of revenue
equipment, and healthcare for our employees. We could also be affected by
strikes or other work stoppages at customer, port, border, or other shipping
locations as well as declines in the resale value of used equipment.
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.
6
Our growth may not continue at historical 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.
Increased prices, reduced productivity, and restricted availability of new
revenue equipment may adversely affect our earnings and cash flows.
We are subject to risk with respect to prices for new tractors. Prices may
increase, for among other reasons, due to government regulations applicable to
newly manufactured tractors and diesel engines and due to commodity prices and
pricing power among equipment manufacturers. More restrictive EPA, emissions
standards that began in 2002 with additional new requirements implemented in
2007 have required vendors to introduce new engines. Additional EPA mandated
emission standards will become effective for newly manufactured trucks beginning
in January 2010. Our business could be harmed if we are unable to continue to
obtain an adequate supply of new tractors and trailers. As of December 31, 2008,
approximately 19% of our tractor fleet was comprised of tractors with engines
that met the EPA-mandated clean air standards that became effective January 1,
2007. Tractors that meet the 2007 standards are more expensive than
non-compliant tractors, and we expect that the 2010 tractors will be more
expensive than non-compliant tractors. Accordingly, we expect to continue to pay
increased prices for tractor equipment as we continue to increase the percentage
of our fleet that meets the EPA mandated clean air standards.
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 partially offset the cost of new revenue equipment.
When the supply of used revenue equipment exceeds the demand for used revenue
equipment as it did during 2008, the general market value of used revenue
equipment decreases. Should this current condition continue, it would increase
our capital expenditures for new revenue equipment, decrease our gains on sale
of revenue equipment, or increase our maintenance costs if management decides to
extend the use of revenue equipment in a depressed market.
We have trade-in and/or repurchase commitments that specify, among other things,
what our primary equipment vendors will pay us for disposal of a substantial
portion of our revenue equipment. The prices we expect to receive under these
arrangements may be higher than the prices we would receive in the open market.
We may suffer a financial loss upon disposition of our equipment if these
vendors refuse or are unable to meet their financial obligations under these
agreements, if we fail to enter into definitive agreements that reflect the
terms we expect, if we fail to enter into similar arrangements in the future, or
if we do not purchase the required number of replacement units from the vendors.
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, weather
related, and market factors that are generally outside our control and each of
which 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,
and recently, in an attempt to further manage our exposure to changes in fuel
prices, we began using derivative instruments designated as cash flow hedges.
Fuel surcharges that can be collected do not always fully offset the increase in
the cost of diesel fuel and there is no assurance that we will be able to
execute successful hedges in the future. To the extent we are not successful in
the negotiations for fuel surcharges and hedging arrangements 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
7
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, may increase even more when the overall
demand for freight services increases with a reversal of the current economic
trends and conditions. 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, or be required to further adjust our driver
compensation package, which would lower our profitability. We have increased our
driver compensation on several occasions in recent years. 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 changes in regulations could have
a materially adverse effect on our business.
Our operations are regulated and licensed by various government agencies,
including the DOT. The DOT, through the 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 "2005 Rules"). In July, 2007, a federal appeals court vacated portions
of the 2005 Rules. Two of the key portions that were vacated include the
expansion of the driving day from 10 hours to 11 hours, and the "34-hour
restart," which allows drivers to restart calculations of the weekly on-duty
time limits after the driver has at least 34 consecutive hours off duty. The
court indicated that, in addition to other reasons, it vacated these two
portions of the 2005 Rules because FMCSA failed to provide adequate data
supporting its decision to increase the driving day and provide for the 34-hour
restart. In November 2008, following the submission of additional data by FMCSA
and a series of appeals and related court rulings, FMCSA published its final
rule, which retains the 11 hour driving day and the 34-hour restart. However,
advocacy groups may continue to challenge the final rule. We are unable to
predict how a court may rule on such challenges and to what extent the new
presidential administration may become involved in this issue. On the whole,
however, we believe a court's decision to strike down the final rule would
decrease productivity and cause some loss of efficiency, as drivers and shippers
may need to be retrained, computer programming may require modifications,
additional drivers may need to be employed or engaged, additional equipment may
need to be acquired, and some shipping lanes may need to be reconfigured. We are
also unable to predict the effect of any new rules that might be proposed if the
final rule is stricken by a court, but any such proposed rules could increase
costs in our industry or decrease productivity.
The FMCSA has proposed a rule that may require companies with a history of
serious hours-of-service violations to install electronic on-board recorders
(EOBR) in all of their commercial vehicles. This installation would be for a
minimum of two years. On January 30, 2008, we completed a full FMCSA compliance
review which found no evidence of any serious violations thereby maintaining its
Satisfactory Safety Rating. During 2008, the DOT issued a rule that now includes
tractor onboard position history as part of supporting documentation in DOT
audits and inquiries. Further, the new rule requires that we maintain six months
of tractor onboard position history. The FMCSA is currently 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 effects, if any, such
proposed rules may have on us.
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.
In general, the increasing burden of regulation raises our costs and lowers our
efficiency. Our company drivers and independent contractors also must comply
with the safety and fitness regulations of the 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 (the "DHS"), also regulate our equipment, operations, and
drivers. 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.
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 (the
"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
8
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 additional EPA emission requirements that became effective in
January 2007 which are discussed above under "Risk Factors - Increased prices,
reduced productivity, and restricted availability of new revenue equipment may
adversely affect our earnings and cash flows." 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 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 on 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. We
have 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 several major customers.
9
For the year ended December 31, 2008, our top 25 customers, based on revenue,
accounted for approximately 70% of our gross revenue. This was not significantly
different than the previous year. 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.
If the estimated fair value of auction rate securities continue to remain below
cost or if the fair value decreases significantly from the current fair value,
we may be required to record an impairment of these investments, through a
charge in the consolidated statement of income, which could have a materially
adverse effect on our earnings.
As of December 31, 2008, all of our auction rate securities were associated with
unsuccessful auctions. Upon an unsuccessful auction, the interest rate of the
underlying investment is reset to a default interest rate. Until a subsequent
auction is successful or the underlying security is called by the issuer, we
will be unable to sell these securities. Based on the unsuccessful auctions that
began during February 2008 and continued through December 31, 2008, we
reclassified these investments to long-term investments. In addition, we
recorded an adjustment to fair value to reflect the lack of liquidity in these
securities through an adjustment to other comprehensive loss. Since auction
failures began and continuing through December 31, 2008, there were no instances
of delinquencies or non-payment of applicable interest from the issuers.
Financial institutions which we originally bought auction rate securities from
and whom current auction rate securities are held with, are parties to various
settlement agreements with certain regulatory authorities. The settlement
agreements provide, among other things, that the financial institutions must use
their best efforts to provide liquidity solutions for auction rate securities
including facilitating issuer redemptions, restructurings, and other reasonable
means. We have no assurance, however, that we will be able to sell these
investments and cannot predict whether future auctions related to our auction
rate securities will be successful. Should we have liquidity requirements before
these financial institutions provide liquidity to auction rate securities, we
may be required to discount these securities in order to liquidate them. Based
on our current financial position, we do not believe that we will have to sell
these securities at a discount, however, if our financial condition changes and
we were able to sell them at a discount, it could have a materially adverse
effect on our financial results.
Under current U.S. generally accepted accounting principles ("GAAP") for valuing
investments, we must value assets and liabilities at the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The estimated
fair value of the underlying investments as of December 31, 2008 declined below
amortized cost of the investments, as a result of liquidity issues in the
auction rate markets. As a result of the fair value measurements, we recognized
an unrealized loss and reduction to investments, of $8.6 million during the year
ended December 31, 2008. We have evaluated the unrealized losses to determine
whether this decline is other than temporary. We have concluded the decline in
fair value to be temporary and as such have recorded the reduction in investment
value as a reduction to stockholders equity. We have the intent and ability to
hold these investments until recovery and they continue to maintain an average
rating of AAA from nationally recognized rating agencies, therefore there was
not any other than temporary impairment recorded in the consolidated statement
of income on these investments during the year ended December 31, 2008. We will
monitor these investments and ongoing market conditions in future periods to
assess impairments considered to be other than temporary. Should estimated fair
value continue to remain below cost or the fair value decrease significantly
from current fair value, we may be required to record an impairment of these
investments, through a charge in the consolidated statement of income. Such
impairment could have a materially adverse effect on our financial 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
10
for anticipated losses and related expenses. We periodically evaluate and adjust
our claims reserves to reflect trends in our own experience as well as industry
trends. 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Heartland's headquarters are located in North Liberty, Iowa which is located on
Interstate 380 near the intersection of Interstates 380 and 80. This represents
a centralized location along the Cedar Rapids/Iowa City business corridor.
The following table provides information regarding the Company's facilities
and/or offices:
-------------------------- -------- -------- -------- ---------------
Company Location Office Shop Fuel Owned or Leased
-------------------------- -------- -------- -------- ---------------
North Liberty, Iowa (1) Yes Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
Ft. Smith, Arkansas No Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
O'Fallon, Missouri No Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
Atlanta, Georgia Yes Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
Columbus, Ohio Yes Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
Jacksonville, Florida Yes Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
Kingsport, Tennessee Yes Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
Olive Branch, Mississippi Yes Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
Chester, Virginia Yes Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
Carlisle, Pennsylvania Yes Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
Phoenix, Arizona (2) Yes Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
Seagoville, Texas (3) Yes Yes Yes Owned
-------------------------- -------- -------- -------- ---------------
(1) The Company moved into its new corporate headquarters in July 2007. Prior
to July 2007 the Company headquarters was located in Iowa City, Iowa and
was located on property that the Company both owned and leased.
(2) The Company leased a facility in Phoenix, Arizona for a portion of 2007. In
2005, the Company acquired fourteen acres of land in Phoenix, Arizona for
the construction of a new regional operating facility. Construction began
in 2006 and was completed in the second quarter of 2007. Construction was
financed by cash flows from operations. The leased facilities did not
include fuel facilities.
(3) The Company acquired this terminal location in August 2008. The Company
completed property renovations late in the fourth quarter of 2008 and
terminal operations began January 5, 2009.
11
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, cargo, 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 2008, no matters were submitted to a vote of
security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
The Company's common stock trades on the NASDAQ Global Select Market under the
symbol HTLD. 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 the NASDAQ Global Select Market and the Company's dividends declared
per common share from January 1, 2007 to December 31, 2008.
Dividends Declared
Period High Low per Common Share
Calendar Year 2008
1st Quarter $ 16.48 $ 12.98 $.020
2nd Quarter 16.40 13.80 .020
3rd Quarter 20.00 14.18 .020
4th Quarter 16.52 12.25 .020
Calendar Year 2007
1st Quarter $ 17.81 $ 15.14 $.020
2nd Quarter 18.92 15.36 2.02
3rd Quarter 17.46 14.11 .020
4th Quarter 15.80 12.98 .020
On February 20, 2009, the last reported sale price of our common stock on the
NASDAQ Global Select Market was $13.03 per share.
The prices reported reflect inter-dealer quotations without retail mark-ups,
markdowns or commissions, and may not represent actual transactions. As of
February 20, 2009, the Company had 186 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 of record
are held 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 twenty-two consecutive quarters. During 2008, the Company
declared quarterly dividends as detailed below.
12
2008 Period
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Announcement date March 11, 2008 June 9, 2008 September 8, 2008 December 2, 2008
Record date March 20, 2008 June 20, 2008 September 19, 2008 December 12, 2008
Payment date April 2, 2008 July 2, 2008 October 2, 2008 December 23, 2008
Payment amount
(per common share) $0.02 $0.02 $0.02 $0.02
Payment amount total
for all shares $1.9 million $1.9 million $1.9 million $1.9 million
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 April 20, 2006, the Board of Directors approved a four-for-three stock split,
affected in the form of a 33 percent stock dividend. The stock split occurred on
May 15, 2006, to shareholders of record as of May 5, 2006. This stock split
increased the number of outstanding shares to 98.4 million from 73.8 million.
The number of common shares issued and outstanding and all per share amounts
have been adjusted to reflect the stock split for all periods presented.
Stock Repurchase
In September 2001, the Board of Directors approved the repurchase of up to 15.4
million shares, adjusted for stock splits, of Heartland Express, Inc. common
stock in open market or negotiated transactions using available cash, cash
equivalents, and investments. During the years ended December 31, 2008 and 2007,
approximately 2.7 million and 1.3 million shares were repurchased, respectively,
in the open market and pursuant to the above-referenced plan and a quarterly
trade plan under Rule 10b5-1, for $36.4 million and $19.4 million, respectively,
at an approximate weighted average price of $13.36 and $14.86 per share,
respectively, and the shares were retired. The cost of such shares purchased and
retired in excess of their par value in the amount of approximately of $36.4
million and $19.4 million during the years ended December 31, 2008 and 2007 was
charged to retained earnings. The authorization to repurchase remains open at
December 31, 2008 and has no expiration date but may be suspended or
discontinued at any time without prior notice. Approximately 9.6 million shares
remain authorized for repurchase under the Board of Director's approval at
December 31, 2008. During January and February 2009, the Company repurchased an
additional 1.8 million shares, at $23.9 million for an average price of $13.16
per share. This has subsequently reduced the remaining authorized shares for
repurchase to 7.8 million shares as of February 20, 2009. Future repurchases are
dependent upon market conditions.
Shares repurchased during the three month period ended December 31, 2008 are as
follows:
(d) Maximum
(c) Total number number of shares
of shares that may yet be
(a) Total purchased as part purchased under
number of (b)Average of publicly the plans or
shares price paid per announced plans programs (in
Period Purchased share or programs millions)
-------------------- --------- -------------- ----------------- ----------------
October 1, 2008 -
October 31, 2008 969,100 $ 13.30 969,100 10.6
November 1, 2008 -
November 30, 2008 569,413 13.44 569,413 10.0
December 1, 2008 -
December 31, 2008 390,587 13.43 390,587 9.6
--------- -----------------
Total 1,929,100 1,929,100
========= =================
13
Share Based Compensation
On March 7, 2002, the Company's chief executive officer transferred 181,500 of
his own shares establishing a restricted stock plan on behalf of key employees.
The shares vested over a five year period or upon death or disability of the
recipient. The shares were valued at the March 7, 2002 market value of
approximately $2.0 million. The market value of $2.0 million was amortized over
a five year period as compensation expense. Compensation expense of $0.1 million
and $0.4 million for the years ended December 31, 2007 and 2006, respectively,
is recorded in salaries, wages, and benefits on the consolidated statements of
income. Compensation expense was not material for the year ended December 31,
2008. All unvested shares were included in the Company's 96.9 million
outstanding shares as of December 31, 2007 and there were not any unvested
shares as of December 31, 2008. As of December 31, 2008 there are no securities
authorized for issuance under equity compensation plans.
A summary of the Company's non-vested restricted stock as of December 31, 2008
and 2007, and changes during the twelve months ended December 31, 2008 and 2007
is presented in the table below:
Grant-date
Shares Fair Value
------------- -------------
Non-vested stock outstanding at January 1, 2007 34,200 $ 11.00
Granted - -
Vested (34,000) 11.00
Forfeited - -
------------- -------------
Non-vested stock outstanding at December 31, 2007 200 11.00
------------- -------------
Non-vested stock outstanding at January 1, 2008 200 11.00
Granted - -
Vested (200) 11.00
Forfeited - -
------------- -------------
Non-vested stock outstanding at December 31, 2008 - $ -
============= =============
The fair value of the shares vested was $0.5 million and $0.6 million for the
twelve months ended December 31, 2007 and 2006, respectively. The fair value of
the shares vested during the twelve months ended December 31, 2008 was not
material.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment," ("SFAS No. 123(R)") a revision of SFAS No. 123, which addressed the
accounting for share-based payment transactions. SFAS No. 123(R) eliminated the
ability to account for employee share-based compensation transactions using APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and generally
required instead that such transactions be accounted and recognized in the
consolidated statement of income based on their fair value. SFAS No. 123(R) 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 Company
implemented SFAS No. 123(R) on January 1, 2006. The unamortized portion of
unearned compensation was reclassified to retained earnings upon implementation.
The amortization of unearned compensation was recorded as additional paid-in
capital effective January 1, 2006 through December 31, 2007. The implementation
of SFAS No. 123(R) had no material effect on the Company's results of operations
for the years ended December 31, 2008, 2007 and 2006.
14
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)
2008 2007 2006 2005 2004
--------- --------- --------- --------- ---------
Statements of Income Data:
Operating revenue .................... $ 625,600 $ 591,893 $ 571,919 $ 523,792 $ 457,086
--------- --------- --------- --------- ---------
Operating expenses:
Salaries, wages, and benefits ...... 197,992 196,303 189,179 174,180 157,505
Rent and purchased transportation .. 18,703 21,421 24,388 29,635 36,757
Fuel ............................... 204,708 164,285 146,240 123,558 83,263
Operations and maintenance ......... 15,575 12,314 12,647 14,955 12,939
Operating taxes and licenses ....... 9,317 9,454 9,143 8,968 8,996
Insurance and claims ............... 24,307 18,110 16,621 17,938 16,545
Communications and utilities ....... 3,693 3,857 3,721 3,554 3,669
Depreciation (2) ................... 46,109 48,478 47,351 38,228 29,628
Other operating expenses ........... 16,807 17,380 17,356 16,697 14,401
Gain on disposal of property
and equipment (2) ................ (9,558) (10,159) (18,144) (8,032) (175)
--------- --------- --------- --------- ---------
527,653 481,443 448,502 419,681 363,528
--------- --------- --------- --------- ---------
Operating income (2) ......... 97,947 110,450 123,417 104,111 93,558
Interest income ...................... 9,132 10,285 11,732 7,373 3,071
--------- --------- --------- --------- ---------
Income before income taxes ........... 107,079 120,735 135,149 111,484 96,629
Federal and state income taxes ....... 37,111 44,565 47,978 39,578 34,183
--------- --------- --------- --------- ---------
Net income (2) ....................... $ 69,968 $ 76,170 $ 87,171 $ 71,906 $ 62,446
========= ========= ========= ========= =========
Weighted average shares
outstanding (1) ...................... 95,900 97,735 98,359 99,125 100,000
========= ========= ========= ========= =========
Earnings per share (1)(2) ............ $ 0.73 $ 0.78 $ 0.89 $ 0.73 $ 0.62
========= ========= ========= ========= =========
Dividends declared per share (1) ..... $ 0.080 $ 2.080 $ 0.075 $ 0.060 $ 0.050
========= ========= ========= ========= =========
Balance Sheet data:
Net working capital (3) .............. $ 33,932 $ 182,546 $ 294,252 $ 271,263 $ 242,472
Total assets ......................... 557,714 526,294 669,070 573,508 517,012
Stockholders' equity ................. 360,039 342,759 495,024 433,252 389,343
The Company had no long-term debt during any of the five years presented.
(1) Years ended December 31, 2005 and 2004 reflect the four-for-three stock
split of May 15, 2006.
(2) Effective July 1, 2005, the Company adopted SFAS No. 153, "Exchanges of
Non-monetary Assets--An Amendment of Accounting Principles Board Opinion No. 29,
Accounting for Non-monetary Transactions" ("SFAS 153"). The prospective
application of SFAS 153 after June 30, 2005 resulted in the immediate
recognition of gains from the trade-in of revenue equipment rather than
reduction in the cost of the new revenue equipment. The recognition of gains
from trade-in of revenue equipment is offset over the equipment life by
increased depreciation expense. For the twelve month periods of 2008, 2007,
2006, and the six month period of 2005, gains reported under application of
guidance in SFAS 153 were $9.2 million, $1.9 million, $17.6 million and $6.5
million, respectively.
(3) Reflects the reclassification of auction rate security investments
classified as short-term investments as of December 31, 2007 to long-term
investments as of December 31, 2008 due to auction failures that began in
February 2008 and continued through December 31, 2008.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for certain historical information contained herein, the following
discussion contains forward-looking statements (as discussed in Item 1 above)
that involve risks, assumptions, and uncertainties which are difficult to
predict. All statements, other than statements of historical fact, are
statements that could be deemed forward-looking statements, including without
limitation: any projections of earnings, revenues, or other financial items; any
statement of plans, strategies, and objectives of management for future
operations; any statements concerning proposed new services or developments; any
statements regarding future economic conditions or performance; and any
statements of belief and any statement of assumptions underlying any of the
foregoing. Words such as "believe," "may," "could," "expects," "hopes,"
"anticipates," and "likely," and variations of these words, or similar
expressions, are intended to identify such forward-looking statements. Actual
events or results could differ materially from those discussed in
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the section
entitled "Item 1A. Risk Factors," set forth above. We do not assume, and
specifically disclaim, any obligation to update any forward-looking statement
contained in this Annual Report.
Overview
Heartland Express, Inc. is a short-to-medium haul truckload carrier. The Company
transports freight for major shippers and generally earns revenue based on the
number of miles per load delivered. The Company operated ten regional operating
divisions that provided regional dry van truckload services from eight regional
operating centers in addition to its corporate headquarters during 2008. The
Company's ten regional operating divisions, not including operations at the
corporate headquarters, accounted for 73.5% and 72.7% of the 2008 and 2007
operating revenues. The Company's newest regional operating center near Dallas,
Texas opened in early January 2009 and increased the Company's regional
operating centers to nine and regional operating divisions to eleven, in
addition to operations at the Company's corporate headquarters. 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. As fuel prices soared to historical highs
during 2008, management of fuel cost became a top priority of management. The
industry experienced soft freight demand throughout the year which forced
downward pressures on freight rates and fuel surcharge rates. The unseasonably
low freight demand the Company experienced through the fourth quarter of 2008
has continued into the first quarter of 2009. The challenging freight
environment throughout the year combined with record high fuel prices, resulted
in many carriers in the trucking industry declaring bankruptcy and or exiting
the industry. The industry continues to fight excess capacity in the market
place along with declining freight volumes due to the current economic downturn.
During 2008 the Company undertook fuel initiative strategies to effectively
manage fuel costs. These initiatives included, encouraging fueling at terminal
locations rather than over-the-road purchases to take advantage of bulk fuel
purchases when cost effective to do so, reduction of tractor idle time and
controlling out-of-route miles. Although the Company experienced declining fuel
costs throughout the second half of 2008, Company management continues to
encourage these initiatives. At December 31, 2008, the Company's tractor fleet
had an average age of 2.2 years while the trailer fleet had an average age of
4.6 years. The Company continues to focus on growing 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.
Quality service allowed the Company to hold its freight rates stable throughout
2008. 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 ended the year with operating revenues of $625.6 million, including
fuel surcharges, net income of $70.0 million, and earnings per share of $0.73 on
weighted average outstanding shares of 95.9 million. The Company posted an 84.3%
operating ratio (operating expenses as a percentage of operating revenues) and
an 11.2% net margin (net income as a percentage of operating revenues). The
Company has total assets of $557.7 million at December 31, 2008. The Company
achieved a return on assets of 12.9% and a return on equity of 19.9%. The
Company's cash flow from operations for the year of $121.8 million was 19.5% of
operating revenues. The Company used $27.1 million in net investing cash flows,
16
mainly due to the purchase of new revenue equipment, and $46.0 million in
financing activities, which was made up of $36.4 million in stock repurchases
and $9.6 million in dividend payments during 2008. As a result, the Company
increased cash and cash equivalents $48.7 million during the year ended December
31, 2008. The Company ended the year with cash, cash equivalents, and
investments of $228.0 million and a debt-free balance sheet.
The decline in the demand for freight services and an overcapacity of trucks has
negatively impacted the operating results of 2008. The soft freight demand has
resulted in downward pressures on freight and fuel surcharge rates and has
resulted in higher empty miles and lower equipment utilization. Fuel expense
during 2008 was the result of two distinct periods of pricing. From January 2008
to July 2008, the Company experienced rising fuel prices that reached a peak
during early July 2008. From early July 2008 to December 2008, the Company
experienced declining fuel prices. U.S. average DOE prices were approximately
$3.38 per gallon the first part of January 2008, which rose to approximately
$4.73 in early July and fell to approximately $2.29 by the end of 2008. Due to
the rise and fall of fuel prices during the year, fuel expense, net of fuel
surcharge recoveries, decreased 3.1% to $79.4 million during the year ended
December 31, 2008 compared to $81.9 million for the year ended December 31,
2007. Annualizing fuel expense, net of fuel surcharge recoveries, at the peak of
fuel during 2008, would have resulted in an increase of approximately 16% in our
net fuel expense for 2008. Therefore increases and decreases in fuel prices, as
we experienced during 2008 will continue to have the potential for materially
affecting our financial results.
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 has sought to solidify its position as an industry
leader in driver compensation by increasing driver compensation three out of the
last five years.
The Company has been recognized as one of the Forbes magazine's "200 Best Small
Companies in America" seventeen times in the past twenty-two years and for the
past seven consecutive years. The Company has paid cash dividends over the past
twenty-two consecutive quarters, including a special dividend of $196.5 million
in May, 2007. The Company became publicly traded in November, 1986 and is traded
on the NASDAQ National Market under the symbol HTLD.
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,
----------------------------
2008 2007 2006
------ ------ ------
Operating revenue ...................... 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses:
Salaries, wages, and benefits ........ 31.6% 33.2% 33.1%
Rent and purchased transportation .... 3.0 3.6 4.3
Fuel ................................. 32.7 27.8 25.6
Operations and maintenance ........... 2.5 2.1 2.2
Operating taxes and license .......... 1.5 1.6 1.6
Insurance and claims ................. 3.9 3.1 2.9
Communications and utilities ......... 0.6 0.7 0.7
Depreciation ......................... 7.4 8.2 8.3
Other operating expenses ............. 2.7 2.9 3.0
Gain on disposal of property
and equipment .................... (1.5) (1.7) (3.2)
------ ------ ------
84.3% 81.3% 78.4%
------ ------ ------
Operating income ................. 15.7% 18.7% 21.6%
Interest income ........................ 1.5 1.7 2.1
------ ------ ------
Income before income taxes ........... 17.1% 20.4% 23.6%
Income taxes ........................... 5.9 7.5 8.4
------ ------ ------
Net income ........................... 11.2% 12.9% 15.2%
====== ====== ======
17
Year Ended December 31, 2008 Compared With Year Ended December 31, 2007
Operating revenue increased $33.7 million (5.7%), to $625.6 million for the year
ended December 31, 2008 from $591.9 million in the 2007 period. The increase in
revenue was the net effect of a $44.2 million increase (51%) in fuel surcharge
revenue from $86.6 million in 2007 to $130.8 million in 2008 offset by a
decrease in freight revenues of $10.5 million from $505.3 million in 2007 to
$494.8 million in 2008. Freight revenues declined $10.5 million (2.0%) on the
net result of fewer miles driven ($13.5 million) and a slight increase in rates
due to general changes in customer mix ($3.0 million). Miles driven year over
year was directly related to soft freight demand experienced during 2008
compared to 2007. The increase in fuel surcharge revenues was the direct result
of higher average fuel prices throughout 2008 compared to 2007. Fuel surcharge
revenues represent fuel costs passed on to customers based on customer specific
fuel charge recovery rates and billed loaded miles.
Salaries, wages, and benefits increased $1.7 million (0.9%), to $198.0 million
for the year ended December 31, 2008 from $196.3 million in the 2007 period. The
increase was the net result of a $2.6 million decrease (1.8%) in driver wages, a
$1 million increase (5.4%) in office and shop wages, a $2.1 million (33.3%)
increase in workers compensation and a $1.4 million increase (19.8%) increase in
health insurance, and a decrease of other benefits and payroll taxes of $0.2
million. During the year ended December 31, 2008, employee drivers accounted for
96% and independent contractors for 4% of the total fleet miles, compared with
95% and 5%, respectively, for 2007. Company driver wages decrease was consistent
with the decrease in freight revenues detailed above due to freight volume
declines in 2008 compared to 2007 with no mileage rate changes during 2008.
Office and shop personnel increased as a result of a higher number of employees
in certain strategic areas as well as annual wage increases. Workers'
compensation expense increased $2.1 million due to an overall increase in
frequency and severity of claims incurred. Health insurance expense increased
$1.4 million due mainly to an increase in average monthly claims.
Rent and purchased transportation decreased $2.7 million (12.6%), to $18.7
million for the year ended December 31, 2008 from $21.4 million in the compared
period of 2007. Of the total decrease, $3.4 million related to a decrease in
miles driven by independent contractors, offset by an increase of $1.2 million
in fuel stabilization payments due to higher average fuel costs during 2008
compared to 2007. The remaining $0.5 million decrease was due to other rents
which included rents on office space prior to the Company moving into a Company
owned terminal location in Phoenix and corporate headquarters in North Liberty
during May and July 2007, respectively.
Fuel increased $40.4 million (24.6%), to $204.7 million for the year ended
December 31, 2008 from $164.3 million for the same period of 2007. The increase
is the net result of an average increase in fuel cost per gallon of $0.85
(31.4%) per gallon from an average of $2.71 per gallon in 2007 to an average of
$3.56 per gallon in 2008 offset by an approximate 5% decrease in total gallons
purchased. The decrease in gallons purchased during 2008 compared to 2007 was
the result of fewer company driver miles due to weaker freight demand and an
increase in fuel economy. The Company's average miles per gallon increased 2.4%
compared to 2007 and out of route miles decreased 9.5% which the Company
attributes to the efforts to manage idle time and out of route costs during the
year.
Operations and maintenance increased $3.3 million (26.8%), to $15.6 million for
the year ended December 31, 2008 from $12.3 million for the compared 2007 period
due to an increase in preventative maintenance and parts replacement related to
an increase in the average age of the tractor fleet, costs associated with trade
truck campaign and higher than usual operations and maintenance costs during the
early months of 2008 based on more adverse weather conditions.
Insurance and claims increased $6.2 million (34.3%), to $24.3 million for the
year ended December 31, 2008 from $18.1 million in the same period of 2007 due
to an increase in the frequency and severity of larger claims during 2008
compared to 2007.
Depreciation decreased $2.5 million (5.2%), to $46.1 million during the year
ended December 31, 2008 from $48.5 million in the compared 2007 period. Tractors
accounted for $3.3 million of the total decrease. The tractor decrease is
attributable to an overall decrease in average depreciation per tractor 2008
compared to 2007 mainly as a result of the average age of the tractor fleet.
This decrease was due to timing of new tractor purchases. New tractors with
higher depreciable bases were not purchased and placed in service until the
third and fourth quarters of 2008, as such older tractor equipment was
depreciated for the majority of 2008. As tractors are depreciated using the 125%
declining balance method, depreciation expense declines in years subsequent to
the first year after initial purchase and continue to decline with the age of
the fleet. The decrease in tractor depreciation was offset by higher
depreciation on buildings, furniture and fixtures, and land improvements due to
a full year of depreciation on our new corporate headquarters facilities (opened
in July 2007) and new Phoenix terminal (opened in June 2007).
18
Other operating expenses were essentially unchanged during the year ended
December 31, 2008 compared to the same period of 2007. Other operating expenses
consists of costs incurred for advertising expense, freight handling, highway
tolls, driver recruiting expenses, and administrative costs.
Gain on the disposal of property and equipment decreased $0.6 million (5.8%), to
$9.6 million during the year ended December 31, 2008 from $10.2 million in the
same period of 2007. During 2008 the Company started a tractor fleet upgrade
campaign and as of December 31, 2008, the Company was approximately 36% through
this campaign. As such, approximately $9.2 million of the 2008 gains related to
gains on traded tractors. During 2007 the Company sold real estate in Columbus,
Ohio, Coralville, Iowa, and Dubois, Pennsylvania recording total gains of
approximately $6.8 million with the remaining gains attributable to revenue
equipment sales and trades. The proceeds received from these sales were used in
the financing of the new corporate headquarters. A tractor fleet upgrade was
completed in December 2006 and therefore tractor trades in 2007 were less than
compared to 2008. The Company does not expect gains on a per tractor basis to be
as high during future years as it has been for the past several years as the
Company will have substantially disposed of all tractors with a lower initial
recorded basis due to purchases of tractors prior to adoption of SFAS 153.
Interest income decreased $1.2 million (11.7%), to $9.1 million during the year
ended December 31, 2008 from $10.3 million in the same period of 2007 as the net
result of a decrease in average cash, cash equivalents, and investments year
over year due primarily to the payment of the special dividend in May 2007
($196.5 million). Offsetting the decrease in average interest bearing balances
was an improved average rate of return on cash, cash equivalents, and
investments. The majority of interest income continues to be associated with the
Company's investment in student loan auction rate securities. The current rates
of return on these investments continues to exceed the rates of return on
similar AAA rated, non taxable securities.
The Company's effective tax rate was 34.7% and 36.9%, respectively, for the
years ended December 31, 2008 and 2007. This decrease is primarily attributable
to a net reduction of tax accruals for uncertain tax positions as required under
FASB Interpretation No. 48 ("FIN 48"). During 2008 the Company's FIN 48 tax
adjustment was a net reduction to tax expense of $2.3 million. This decrease
relates to the reduction of the accrual for uncertain tax positions and
associated accrued penalties and interest due to lapse of applicable statute of
limitations.
As a result of the foregoing, the Company's operating ratio (operating expenses
as a percentage of operating revenue) was 84.3% during the year ended December
31, 2008 compared with 81.3% during the year ended December 31, 2007. Net income
decreased $6.2 million (8.2%), to $70.0 million for the year ended December 31,
2008 from $76.2 million during the compared 2007 period as a result of the net
effects discussed above.
Year Ended December 31, 2007 Compared With Year Ended December 31, 2006
Operating revenue increased $20.0 million (3.5%), to $591.9 million for the year
ended December 31, 2007 from $571.9 million in the 2006 period. The increase in
revenue resulted from the Company's expansion of its fleet, increased freight
miles, and improved freight rates. Operating revenue for both periods was
positively impacted by fuel surcharges assessed to customers. Fuel surcharge
revenue increased $5.2 million, (6.4%) to $86.6 million for the year ended
December 31, 2007 from $81.4 million in the compared 2006 period.
Salaries, wages, and benefits increased $7.1 million (3.8%), to $196.3 million
for the year ended December 31, 2007 from $189.2 million in the 2006 period.
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
driver pay increases. The Company increased driver pay by $0.01 per mile in
January 2006 for all drivers maintaining a valid hazardous materials endorsement
on their commercial driver's license and implemented quarterly pay increases in
2006 for selected operating divisions. The cumulative impact of the quarterly
increases to driver compensation in 2006 resulted in a cost increase of
approximately $1.8 million for the year ended December 31, 2007. During the year
ended December 31, 2007, employee drivers accounted for 95% and independent
contractors for 5% of the total fleet miles, compared with 94% and 6%,
respectively, for 2006. Additional miles in 2007 by company drivers accounted
for approximately $4.0 million increase in wages over 2006. Workers'
compensation expense increased $2.3 million (53.6%) to $6.5 million for the year
ended December 31, 2007 from $4.2 million in for the same period in 2006 due to
an increase in frequency and severity of claims. Health insurance expense
decreased $1.4 million (16.2%) to $7.1 million for the year ended December 31,
2007 from $8.5 million in the same period of 2006 due to a decrease in frequency
and severity of claims. The remaining increase was the result of non-driver
payroll increases.
19
Rent and purchased transportation decreased $3.0 million (12.2%), to $21.4
million for the year ended December 31, 2007 from $24.4 million in the compared
period of 2006. This reflects the Company's decreased reliance upon independent
contractors. Rent and purchased transportation for both periods includes amounts
paid to independent contractors under the Company's fuel stability program. In
the first quarter of 2006, the Company increased the independent contractor base
mileage pay by $0.01 per mile for all independent contractors maintaining a
hazardous materials endorsement on their commercial driver's license, and an
additional $0.01 per mile per quarter in 2006 beginning on April 1, 2006. These
base mileage pay increases of approximately $0.3 million in 2007 were offset by
a decrease attributable to fewer miles driven by independent contractors.
Fuel increased $18.0 million (12.3%), to $164.3 million for the year ended
December 31, 2007 from $146.2 million for the same period of 2006. The increase
is the result of an increase in fuel cost per gallon, an increased reliance on
company-owned tractors, and a decrease in fuel economy associated with certain
EPA mandated clean air engine requirements on tractor models acquired during
2006. The Company's fuel cost per company-owned tractor mile increased 9.3%
during 2007 compared to 2006. Fuel cost per mile, net of fuel surcharge,
increased 14.7% in 2007 compared to 2006. The Company's fuel cost per gallon
increased 7.2% in 2007 and average miles per gallon decreased 2.2% compared to
2006.
Operations and maintenance decreased $0.3 million (2.6%), to $12.3 million for
the year ended December 31, 2007 from $12.6 million for the compared 2006 period
due to an increase in preventative maintenance and parts replacement.
Operating taxes and licenses increased $0.3 million (3.4%), to $9.5 million for
the year ended December 31, 2007 from $9.1 million in the compared 2006 period
due an increase in the property taxes associated with new facilities in Phoenix,
Arizona and North Liberty, Iowa and an increase in fuel taxes paid.
Insurance and claims increased $1.5 million (9.0%), to $18.1 million for the
year ended December 31, 2007 from $16.6 million in the same period of 2006 due
to an increase in the frequency of larger claims and development increases on
existing liability claims.
Depreciation increased $1.1 million (2.4%), to $48.5 million during the year
ended December 31, 2007 from $47.4 million in the compared 2006 period. This
increase is attributable to the growth of our company-owned tractor and trailer
fleet, and an increased cost of new tractors and trailers relative to the costs
of those units being replaced. Our tractor and trailer fleet have grown
approximately 3.4% and 5.7% respectively in comparison to the same period in
2006. This contributed to a $0.6 million increase in revenue equipment
depreciation during 2007. Also, higher depreciation on new corporate
headquarters facilities and new Phoenix terminal contributed to an increase of
$0.5 million in other property and equipment depreciation.
Other operating expenses were essentially unchanged during the year ended
December 31, 2007 compared to the same period of 2006. Other operating expenses
consists of costs incurred for advertising expense, freight handling, highway
tolls, driver recruiting expenses, and administrative costs.
Gain on the disposal of property and equipment decreased $8.0 million (44.0%),
to $10.2 million during the year ended December 31, 2007 from $18.1 million in
the same period of 2006. The decline is attributable to an 87% decrease in the
total number of tractors and trailers traded during the 2007 period compared to
the same period of 2006. A tractor fleet upgrade was completed in December 2006.
During 2007 the Company sold real estate in Columbus, Ohio, Coralville, Iowa,
and Dubois, Pennsylvania recording total gains of approximately $6.8 million.
The proceeds received from these sales were used in the financing of the new
corporate headquarters.
Interest income decreased $1.4 million (12.3%), to $10.3 million during the year
ended December 31, 2007 from $11.7 million in the same period of 2006 because of
the decrease in cash, cash equivalents, and investments associated with the
payment of the special dividend in May 2007 offset by improved rate of return on
cash, cash equivalents, and short-term investments.
The Company's effective tax rate was 36.9% and 35.5%, respectively, for the
years ended December 31, 2007 and 2006. The increase is primarily attributable
to a higher effective state rate as a result of the adoption of FASB
Interpretation No. 48 ("FIN 48") effective January 1, 2007.
As a result of the foregoing, the Company's operating ratio (operating expenses
as a percentage of operating revenue) was 81.3% during the year ended December
31, 2007 compared with 78.4% during the year ended December 31, 2006. Net income
20
decreased $11.0 million (12.6%), to $76.2 million for the year ended December
31, 2007 from $87.2 million during the compared 2006 period as a result of the
net effects discussed above.
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,
EPA mandated new engine emission requirements on tractor engines manufactured
after January 1, 2007, and driver comfort have resulted in higher tractor
prices, as well as 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. During 2008 the Company experienced a 17% increase in tractor prices
associated with tractors with latest engine emission requirements compared to
tractor prices associated with the last fleet upgrade with pre-January 2007
tractor engines. The majority of this increase was not limited by increases in
freight rates during 2008.
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, compared to historical averages, were high throughout 2005, 2006,
and 2007, and reached historical highs during 2008, thus increasing our cost of
operations. In addition to the increased fuel costs, the reduced fuel efficiency
of the new EPA engines has put additional pressure on profitability due to
increased fuel consumption. Competitive conditions in the transportation
industry during 2007 and 2008, such as lower demand for transportation services,
has and will continue to affect the Company's ability to obtain rate increases
or fuel surcharges until there is improvement in the demand for transportation
services.
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 which was the case
during 2008 with the 575 new tractors and 400 new trailers that were acquired.
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, 2008,
was net cash provided by operating activities of $121.8 million compared to
$120.4 million in 2007 due primarily to net income (excluding non-cash
depreciation, deferred tax and amortization of unearned compensation, and gains
on disposal of equipment) being approximately $6.3 million lower in 2008
compared to 2007 offset with an increase in operating cash flow generated by
operating assets and liabilities of approximately $8.0 million. The net increase
in cash provided by operating assets and liabilities was primarily the result of
reductions in accounts receivable balances due to collections, increases in
accident and workers compensation insurance accruals, offset by reductions in
accrued income taxes mainly due to uncertain tax position accrual changes. Cash
flow from operating activities was 19.5% of operating revenues in 2008 compared
with 20.3% in 2007.
Capital expenditures for property and equipment, net of trade-ins, totaled $35.9
million for 2008 compared to $43.6 million during 2007. The majority of the 2008
capital expenditures related to the purchase of new tractors and trailers. The
Company currently expects capital expenditures for property and equipment, net
of trades in 2009, to be approximately $55 million. The expected increase in
cash outflows for property and equipment, net of trade-ins in 2009, is mainly
due to remainder of the Company's purchase commitment for our current tractor
fleet upgrade campaign. Also included in total expenditures in 2008 was
approximately $1.5 million associated with the acquisition of the Company's
terminal location near Dallas, Texas. Total expenditures for the new corporate
headquarters, including furniture and fixtures, and shop facility in North
Liberty, Iowa and our Phoenix facility were approximately $19.7 million during
2007.
The Company paid cash dividends of $9.6 million in 2008 compared to $204.3
million in 2007. The Company paid a one-time special dividend of $196.5 million
during the second quarter of 2007. All dividends declared during 2008 were paid
during 2008.
The Company paid income taxes of $36.7 million in 2008 which was a decrease of
$4.9 million compared to $41.6 million paid in 2007. The decrease was mainly due
to a decrease in federal tax payments during the year as a result of a reduction
in taxable income in 2008 compared to 2007 due mainly to lower income before
taxes and the 50% bonus depreciation allowed on new tractor and trailer
purchases during 2008.
21
In September 2001, the Board of Directors approved the repurchase of up to 15.4
million shares, adjusted for stock splits, of Heartland Express, Inc. common
stock in open market or negotiated transactions using available cash, cash
equivalents, and investments. During the years ended December 31, 2008 and 2007,
approximately 2.7 million and 1.3 million shares were repurchased, respectively,
in the open market and pursuant to the above-referenced plan and a quarterly
trade plan under Rule 10b5-1, for $36.4 million and $19.4 million, respectively,
at an approximate weighted average price of $13.36 and $14.86 per share,
respectively, and the shares were retired. The cost of such shares purchased and
retired in excess of their par value in the amount of approximately of $36.4
million and $19.4 million during the years ended December 31, 2008 and 2007 was
charged to retained earnings. The authorization to repurchase remains open at
December 31, 2008 and has no expiration date but may be suspended or
discontinued at any time without prior notice. Approximately 9.6 million shares
remain authorized for repurchase under the Board of Director's approval at
December 31, 2008. During January and February 2009, the Company repurchased an
additional 1.8 million shares, at $23.9 million for an average price of $13.16
per share. This has subsequently reduced the remaining authorized shares for
repurchase to 7.8 million shares as of February 20, 2009. Future repurchases are
dependent upon market conditions.
Management believes the Company has adequate liquidity to meet its current and
projected needs. Management believes the Company will continue to have
significant capital requirements over the long-term which are expected to be
funded from cash flow provided by operations and from existing cash, cash
equivalents, and short-term investments. The Company ended the year with $228.0
million in cash, cash equivalents, and investments. The Company's balance sheet
remains debt free. Net working capital for the year ended December 31, 2008
decreased by $151.6 million over 2007. The most significant factor causing the
decrease was the reclassification of short-term investments in auction rate
securities of approximately $186.9 million to long-term investments. Excluding
the reclassification of investments, working capital increased $22.5 million in
2008 compared to 2007. Subsequent to auction failures of auction rate student
loan securities that began in mid-February 2008, the Company has been
redirecting its investments towards its cash and cash equivalents. Based on the
Company's strong financial position, management believes outside financing could
be obtained, if necessary, to fund capital expenditures.
As of December 31, 2008, all of the Company's $171.1 million long-term
investment balance was invested in auction rate student loan educational bonds.
The majority, (approximately 96.1% at par) of the underlying investments is
backed by the U.S. government and continues to hold AAA (or equivalent) ratings
from recognized rating agencies. The remaining 3.9% of the student loan auction
rate securities portfolio hold AA ratings and were insurance backed securities.
Beginning in mid-February 2008, the auction rate securities began experiencing
auction failures due to general liquidity concerns. Prior to the Company
experiencing unsuccessful auctions, the auction rate security investments were
classified as short-term as they were auctioned and sold or interest rates were
reset through a regular auction process generally occurring at least every 35
days from the initial purchase. Due to the current lack of liquidity in these
markets, the Company's current options are to hold the investments until called
by the issuer or until maturity and continue to earn average rates of return
that currently exceed the average rates of return on other AAA rated,
short-term, tax free instruments or sell its investments at a discount.
Management continues to believe that current amounts of cash and cash
equivalents along with cash flows from operations are sufficient to meet the
Company's short term cash flow requirements and therefore has chosen to hold
such investments until successful auctions resume or the investments are called
by the issuer rather than selling the securities at discounted prices. Should
the need arise, the Company believes it would be able to secure financing,
without selling investments at a discount, based on the Company's current debt
free balance sheet, strong operating results and the fact that certain financial
institutions are offering loans secured by the auction rate securities relating
to the settlement agreements between certain regulatory agencies, and various
financial institutions, as discussed below.
The Company was required to estimate the fair value of the auction rate
securities applying guidance in Statement of Financial Accounting Standards
("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157") which became effective
for the Company as of January 1, 2008. Fair value represents an estimate of what
the Company could have sold the investments for in an orderly transaction with a
third party as of the December 31, 2008 measurement date although it is not the
intent of the Company to sell such securities at discounted pricing.
Historically, the fair value of such investments was reported based on amortized
cost. Until auction failures began, the fair value of these investments were
calculated using Level 1 observable inputs per SFAS 157 and fair value was
deemed to be equivalent to amortized cost due to the short-term and regularly
occurring auction process. Based on auction failures beginning in mid-February
2008 and continued failures through December 31, 2008, there were not any
observable quoted prices or other relevant inputs for identical or similar
securities. Estimated fair value of all auction rate security investments as of
December 31, 2008 was calculated using unobservable, Level 3 inputs, as defined
by SFAS 157 due to the lack of observable market inputs specifically related to
student loan auction rate securities. As such, the reported fair value could
significantly change in future measurement periods.
22
The estimated fair value of the underlying investments as of December 31, 2008
declined below amortized cost of the investments, as a result of liquidity
issues in the auction rate markets. With the assistance of the Company's
financial advisors, fair values of the student loan auction rate securities were
estimated using a discounted cash flow approach to value the underlying
collateral of the trust issuing the debt securities considering the estimated
average life of the underlying student loans that are the collateral to the
trusts, principal outstanding, expected rates of returns, and payout formulas.
These underlying cash flows were discounted using interest rates consistent with
instruments of similar quality and duration with an adjustment for a higher
required yield for lack of liquidity in the market for these auction rate
securities. The Company obtained an understanding of assumptions in models used
by third party financial institutions to estimate fair value and considered
these assumptions in the Company's cash flow models but did not exclusively use
the fair values provided by financial institutions based on their internal
modeling. The Company is aware that trading of student loan auction rate
securities is occurring in secondary markets which were considered in the
Company's fair value assessment although the Company has not listed any of its
assets for sale on the secondary market. As a result of the fair value
measurements, the Company recognized an unrealized loss and reduction to
investments, of $8.6 million during the twelve month period ended December 31,
2008. There was not any unrealized loss on investments as of December 31, 2007
as the auctions had functioned regularly through that date. The unrealized loss
of $8.6 million, net of tax, was recorded as an adjustment to other accumulated
comprehensive loss. The fair value adjustment did not have any impact on the
Company's consolidated statement of income for the twelve months ended December
31, 2008.
During the third and fourth quarters of 2008 various financial institutions and
respective regulatory authorities announced proposed settlement terms in
response to various regulatory authorities alleging certain financial
institutions misled investors regarding the liquidity risks associated with
auction rate securities that the respective financial institutions underwrote,
marketed and sold. Further the respective regulatory authorities alleged the
respective financial institutions misrepresented to customers that auction rate
securities were safe, highly liquid investments that were comparable to money
markets. Certain settlement agreements were finalized prior to December 31,
2008. In general, the majority of our auction rate security investments were not
covered by the terms of the above mentioned settlement agreements. The focus of
the initial settlements was generally towards individuals, charities and
businesses with small investment balances, holdings of $25 million and less. As
part of the general terms of the settlements, the respective financial
institutions have agreed to provide their best efforts in providing liquidity to
the auction rate securities market for investors not specifically covered by the
terms of the respective settlements. Such liquidity solutions could be in the
form of facilitating issuer redemptions, resecuritizations, or other means. The
Company can not currently project when liquidity will be obtained from these
investments, and currently plans to hold such securities until the securities
are called, redeemed, or resecuritized by the debt issuers.
A portion of these holdings (3.9% at par value) were specifically covered by a
settlement agreement which the Company signed during the fourth quarter of 2008.
By signing the settlement agreement the Company relinquished its rights to bring
any claims against the financial institution as well as its right to serve as a
class representative or receive benefits under any class action. Further, the
Company no longer has the sole discretion and right to sell or otherwise dispose
of, and/or enter orders in the auction process with respect to the underlying
securities. As part of the settlement, the Company obtained a put option to sell
the underlying securities to the financial institution, which is exercisable
during the period starting on June 30, 2010 through July 2, 2012 plus accrued
interest. Should the financial institution sell or otherwise dispose of our
securities the Company will receive the par value of the securities plus accrued
interest one business day after the transaction. Upon signing the settlement
agreement the Company no longer exhibits the intent and ability to hold the
underlying securities for recovery of the temporary decline in fair value. The
Company also acquired an asset, a put option that is to be valued as a stand
alone financial instrument separate from the underlying securities. The amount
deemed as a loss due to temporary impairment of securities was not materially
different from the amount of the gain recorded to recognize the fair value of
the put option acquired as part of the settlement. As such, there was not any
impact to the Company's consolidated statement of income for the signing of this
settlement agreement. The estimated fair value of the put option combined with
the estimated fair value of the underlying securities, as of December 31, 2008
is set at par value of the securities. The par value of these securities is
included in long-term investments per the consolidated balance sheet.
The Company has evaluated the unrealized losses, on securities other than
securities covered by the settlement agreement discussed above, to determine
whether this decline is other than temporary. Management has concluded the
decline in fair value to be temporary based on the following considerations.
o Current market activity and the lack of severity or extended decline
do not warrant such action at this time.
23
o During June 2008, the Company received $1.1 million as the result of a
partial call by an issuer. The Company received par value for the
amount of the call plus accrued interest.
o During third quarter of 2008, the Company received $8.0 million in
calls by the underlying issuers. The Company received par value for
the amount of the call plus accrued interest.
o During the fourth quarter of 2008, the Company received $9.5 million
in calls by the underlying issuers. The Company received par value for
the amount of the call plus accrued interest.
o Based on the Company's financial operating results, operating cash
flows and debt free balance sheet, the Company has the ability and
intent to hold such securities until recovery of the unrealized loss.
o There have not been any significant changes in collateralization and
ratings of the underlying securities since the first failed auction.
The Company continues to hold 96.1% of the auction rate security
portfolio in senior positions of AAA (or equivalent) rated securities.
o The Company is not aware of any changes in default rates of the
underlying student loans that are the assets to the trusts issuing the
auction rate security debt.
o Currently there is legislative pressure to provide liquidity in
student loan investments, providing liquidity to state student loan
agencies, to continue to provide financial assistance to eligible
students to enable higher educations. This has the potential to impact
existing securities with underlying student loans.
o As individual trusts that are the issuers of the auction rate student
loan debt, which the Company holds, continue to pay higher default
rates of interest, there is the potential that the underlying trust
would seek alternative financing and call the existing debt at which
point it is estimated the Company would receive par value of the
investment.
o All of the auction rate securities are held with financial
institutions that have agreed in principle to settlement agreements
with various regulatory agencies to provide liquidity. Although the
principles of the respective settlement agreements focus mostly on
small investors (generally companies and individual investors with
auction rate security assets less than $25 million), the respective
settlements state the financial institutions will work with issuers
and other interested parties to use their best efforts to provide
liquidity solutions to companies not specifically covered by the
principle terms of the respective settlements by as early as the end
of 2009 in certain settlement agreements.
In addition to the items noted above, the Company has the intent and ability to
hold these investments until recovery, therefore there was not any other than
temporary impairment recorded on these investments, other than the investments
specifically covered by the settlement agreement discussed above, during the
year ended December 31, 2008. The effects of the settlement agreement noted
above did not result in any net impairment charge being recorded in the
consolidated statement of income during the year ended December 31, 2008.
Management will monitor its investments and ongoing market conditions in future
periods to assess impairments considered to be other than temporary. Should
estimated fair value continue to remain below cost or the fair value decrease
significantly from current fair value, the Company may be required to record an
impairment of these investments, through a charge in the consolidated statement
of income.
Off-Balance Sheet Transactions
The Company's liquidity is not materially affected by off-balance sheet
transactions.
24
Contractual Obligations and Commercial Commitments
The following sets forth our contractual obligations and commercial commitments
at December 31, 2008.
Payments due by period (in millions)
--------------------------------------------------------------------------------
Less than 1-3 3-5
Contractual Obligations Total 1 year years years Other
---------------------------------- --------- ----------- ------- ------- -------
Purchase Obligation (1) $ 54.8 $ 54.8 $ - $ - $ -
---------------------------------- -------- ------------ ------- ------- -------
Operating Lease Obligations $ - $ - $ - $ - $ -
--------------------------------- -------- ------------ ------- ------- -------
FIN 48 Obligations, including $ 35.3 $ - $ - $ - $ 35.3
Interest and penalties (2)
---------------------------------- -------- ------------ ------- ------- -------
$ 90.1 $ 54.8 $ - $ - $ 35.3
======== ============ ======= ======= =======
(1) The purchase obligations reflect the total purchase price, net of trade
values of traded tractors, for tractors scheduled to be delivered during
2009. These purchases are expected to be financed by existing cash and cash
flows from operations.
(2) FIN 48 Obligations represent potential liabilities associated with
unrecognized tax benefits. The amount includes interest and penalties. The
Company is unable to reasonably determine when these amounts will be
settled.
As of December 31, 2008 the Company did not have any significant operating lease
obligations, capital lease obligations or outstanding long-term debt
obligations.
The Company recognized additional tax liabilities of $4.8 million with a
corresponding reduction to beginning retained earnings as of January 1, 2007 as
a result of the adoption of FIN 48. The total amount of gross unrecognized tax
benefits was $25.2 million as of January 1, 2007, the date of adoption and $25.7
million at December 31, 2007. At December 31, 2008, the Company had a total of
$22.9 million in gross unrecognized tax benefits. Of this amount, $14.9 million
represents the amount of unrecognized tax benefits that, if recognized, would
impact our effective tax rate. Unrecognized tax benefits were a net decrease of
approximately $2.7 million during the year ended December 31, 2008, due mainly
to the expiration of certain statutes of limitation net of additions. The total
net amount of accrued interest and penalties for such unrecognized tax benefits
was $12.3 million at December 31, 2008 and $11.9 million at December 31, 2007
and is included in income taxes payable. Net interest and penalties included in
income tax expense for the three and twelve month periods ended December 31,
2008 was an additional tax expense of approximately $0.2 million and $0.4
million, respectively. Net interest and penalties included in income tax expense
for the three and twelve month periods ended December 31, 2007 was an additional
tax expense of $0.3 million and $1.5 million, respectively. These unrecognized
tax benefits relate to risks associated with state income tax filing positions
for the Company's corporate subsidiaries.
A number of years may elapse before an uncertain tax position is audited and
ultimately settled. It is difficult to predict the ultimate outcome or the
timing of resolution for uncertain tax positions. It is reasonably possible that
the amount of unrecognized tax benefits could significantly increase or decrease
within the next twelve months. These changes could result from the expiration of
the statute of limitations, examinations or other unforeseen circumstances. As
of December 31, 2008, the Company did not have any ongoing examinations or
outstanding litigation related to tax matters and is currently aware of a state
examination that will be conducted in 2009. At this time, management's best
estimate of the reasonably possible change in the amount of gross unrecognized
tax benefits to be a decrease of approximately $3.0 to $4.0 million during the
next twelve months mainly due to the expiration of certain statute of
limitations. The federal statute of limitations remains open for the years 2005
and forward. Tax years 1998 and forward are subject to audit by state tax
authorities depending on the tax code of each state.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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
25
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.
* 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 income tax assets that are determined not to be realizable. A
valuation allowance for deferred income tax assets has not been
established other than $2.8 million allowance for a deferred tax asset
associated with the auction rate securities fair value adjustment, due
to the profitability of the Company's business. Further, management
judgment is required in the accounting for uncertainty in income taxes
recognized in the financial statements based on recognition threshold
and measurement attributes for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.
* Investments are valued at fair value applying a fair value hierarchy
as established by applicable GAAP. Fair value estimates the price that
would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement
date. As there is not an active market for these securities,
management utilizes a discounted cash flow model with key assumptions
being the discount rate, rate of return and duration. Management does
not consider there to be significant credit risk due to government
support of the underlying loans and current credit ratings. Management
monitors its investments and ongoing market conditions to assess
impairments considered to be other than temporary. Should estimated
fair values continue to remain below cost or the fair value decreases
significantly from current fair value, the Company may be required to
record an impairment of these investments, through a charge in the
consolidated statement of income. The Company has not recorded any
impairment of these investments in the consolidated statement of
income.
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
All of the Company's long-term investments as of December 31, 2008 were in
auction rate student loan educational bonds backed by the U.S. government. The
investments typically have an interest reset provision of 35 days with
contractual maturities generally greater than 20 years from the date of original
issuance. The range of maturities, based on date of original issuance, of
securities currently held by the Company is 5 to 38 years. The majority (96.1%
par value) of such investments held by the Company have AAA (or equivalent)
ratings from a recognized rating agency and the remaining securities are rated
AA. At the reset date, the Company has the option to roll the investment and
reset the interest rate or sell the investment in an auction. The Company
receives the par value of the investment plus accrued interest on the reset date
if the underlying investment is sold in an auction. There is no guarantee that
when the Company elects to participate in an auction and therefore sell
investments, that a willing buyer will purchase the security and therefore there
is no guarantee that the Company will receive cash upon the election to sell.
The Company experienced unsuccessful auctions beginning in February 2008 and
continuing through December 31, 2008 (as discussed in the footnotes to the
26
financials and elsewhere in this report). Upon an unsuccessful auction, the
interest rate of the underlying investment is reset to a default maximum
interest rate as stated in the prospectus of the underlying security. Until a
subsequent auction is successful or the underlying security is called by the
issuer, the Company will be required to hold the underlying investment until
maturity. The Company only holds senior positions of underlying securities. The
Company does not invest in asset backed securities and does not have direct
securitized sub prime mortgage loans exposure or loans to, commitments in, or
investments in sub prime lenders. Should the Company have a need to liquidate
any of these investments, the Company may be required to discount these
securities for liquidity but the Company currently does not have this liquidity
requirement. Based on historical and current operating cash flows, the Company
does not currently anticipate a requirement to liquidate underlying investments
at discounted prices. If the investments are downgraded in the credit ratings or
the Company witnesses other indicators of issues with collection, the Company
may be required to recognize an impairment (other than the temporary impairment
already recognized) on these securities and record a charge in the statement of
income.
Assuming the Company maintains all of its long and short-term investment
balances as of December 31, 2008, $180.2 million (par value), and if market
rates of interest on these investments decreased by 100 basis points, the
estimated reduction in annual interest income would be approximately $1.8
million.
The Company has no debt outstanding as of December 31, 2008 and therefore, has
no market risk related to debt.
Volatile fuel prices will continue to impact us significantly. Based on the
Company's historical experience, the Company is not able to pass through to
customers 100% of fuel price increases. For the years ended December 31, 2008,
2007, and 2006, fuel expense, net of fuel surcharge revenue, was $79.4 million,
$81.9 million, and $69.5 million or 19.7%, 20.5% and 18.7%, respectively, of the
Company's total operating expenses, net of fuel surcharge. The above mentioned
period of 2008 includes approximately half of the year at fuel prices that
rapidly increased and the second half of the year at fuel prices that rapidly
decreased negating the volatile fluctuation in fuel prices during the year. As
of July 31, 2008, near the fuel prices peak, fuel expense, net of fuel
surcharge, was approximately 22.6% of the Company's total operating expenses,
net of fuel surcharge. A significant increase in fuel costs, as seen in the
first half of 2008, or a shortage of diesel fuel, did and could continue to
materially adversely affect the Company's results of operations.
In February 2007, the Board of Directors authorized the Company to begin hedging
activities related to commodity fuels. Subsequent to December 31, 2008 the
Company has contracted with an unrelated third party to hedge forecasted future
cash flows related to fuel purchases associated with fuel consumption not
covered by fuel surcharge agreements. The hedged forecasted future cash flows
was transacted through the use of certain swap investments. The Company has
implemented the provisions of Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", ("SFAS
133"), and has designated such hedges as cash flow hedges. Under the guidance of
SFAS 133, the Company will record an asset or liability for the fair value of
the hedging instrument each reporting period with the change in the effective
portion of the hedging instrument (as defined by SFAS 133) included in other
comprehensive income (loss) and any ineffective portion of the hedging
instrument (as defined by SFAS 133) recognized in the statement of income as a
component of fuel expense. The hedging strategy was implemented mainly to reduce
the Company's exposure to significant upward movements in diesel fuel prices
related to fuel consumed by empty and out-of-route miles and truck engine idling
time which is not recoverable through fuel surcharge agreements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of KPMG LLP, the Company's independent registered public accounting
firm, financial statements of the Company and its consolidated subsidiaries and
the notes thereto, and the financial statement schedule are included beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures - The Company has established
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) 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 of the Company's disclosure controls and procedures as
of December 31, 2008, the principal executive officer and principal financial
officer of the Company have concluded that the Company's disclosure controls and
procedures 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
accumulated, recorded, processed, summarized and communicated to management,
including the principal executive and principal financial officer, to allow
timely decisions regarding required disclosure as well as cause such information
to be reported within the time periods specified in SEC rules and forms.
Management's Annual 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, 2008.
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, 2008. The Company's auditor, KPMG
LLP, an independent registered public accounting firm, has issued an audit
report on the effectiveness of the Company's internal control over financial
reporting, which is included in this filing on page 29.
Changes in Internal Control Over Financial Reporting - There were no changes in
our internal control over financial reporting that occurred during the quarter
ended December 31, 2008, that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
28
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Heartland Express, Inc.:
We have audited Heartland Express, Inc. and subsidiaries' (the "Company")
internal control over financial reporting as of December 31, 2008, 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 included in the accompanying Management's
Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on 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, assessing the risk that a material weakness exits, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included 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, Heartland Express, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
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, 2008 and 2007, 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, 2008,
and our report dated February 24, 2009 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Des Moines, Iowa
February 24, 2009
29
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by Item 10 of Part III, with the exception of the Code
of Ethics discussed below, is incorporated herein by reference to the Company's
Proxy Statement for the annual shareholders' meeting to be held on May 7, 2009
(the "Proxy Statement").
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.heartlandexpress.com (and in print to any shareholder who requests them).
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Part III is incorporated herein by
reference to the Company's Proxy Statement and is included within the Proxy
Statement under the heading Compensation Discussion and Analysis.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 of Part III is incorporated herein by
reference to the Proxy Statement and is included within the Proxy Statement
under the heading Security Ownership of Principal Stockholders and Management.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 of Part III is incorporated herein by
reference to the Proxy Statement and is included within the Proxy Statement
under the headings Certain Relationships and Related Transactions and Corporate
Governance and Board of Directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 of Part III is incorporated herein by
reference to the Proxy Statement and is included within the Proxy Statement
under the heading Relationship with Independent Registered Public Accounting
Firm.
30
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements and Schedules.
Report of Independent Registered Public Accounting Firm .............. F-1
Consolidated Balance Sheets - December 31, 2008 and 2007.............. F-2
Consolidated Statements of Income - Years ended
December 31, 2008, 2007 and 2006.................................... F-3
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2008, 2007 and 2006........................ F-4
Consolidated Statements of Cash Flows -
Years ended December 31, 2008, 2007 and 2006........................ F-5
Notes to Consolidated Financial Statements............................ F-6
2. Financial Statements Schedule
Valuation and Qualifying Accounts and Reserves-
Years ended December 31, 2008, 2007 and 2006........................ S-1
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.
3. Exhibits - 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 Amended and Restated Bylaws Incorporated by reference to the
Company's Form 10-K, for the
year ended December 31, 2007,
dated February 28, 2008.
3.3 Certificate of Amendment Incorporated by reference to the
to Articles of Incorporation 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 Amended and Restated Bylaws Incorporated by reference to the
Company's Form 10-K, for the
year ended December 31, 2007,
dated February 28, 2008
4.3 Certificate of Amendment to Incorporated by reference to the
Articles of Incorporation Company's Form 10-QA, for the
quarter ended June 30, 1997,
dated March 20, 1998.
31
9.1 Voting Trust Agreement dated Incorporated by reference to the
June 6, 1997 between Larry Company's Form 10-K for the year
Crouse, as trustee under the ended December 31, 1997.
Gerdin Educational Trusts, and Commission file no. 0-15087.
Larry Crouse, voting trustee.
9.2 Voting Trust Agreement dated Incorporated by reference to the
July 10, 2007 between Lawrence Company's Form 10-K, for the
D. Crouse, as the voting year ended December 31, 2007,
trusteefor certain Grantor dated February 28, 2008.
Retained Annuity Trusts
established by Russell A. Gerdin
and Ann S.Gerdin ("GRATS"), and
Mr. and Mrs. Gerdin, the
trustees for certain GRATS.
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.
10.3* Nonqualified Deferred Incorporated by reference to the
Compensation Plan Company's Form 10-K for the year
ended December 31, 2006.
Commission file no. 0-15087.
21 Subsidiaries of the Registrant Filed herewith.
31.1 Certification of Chief Filed herewith.
Executive Officer pursuant to
Rule 13a-14(a) and Rule
15d-14(a) of the Securities
Exchange Act, as amended.
31.2 Certification of Chief Filed herewith.
Financial Officer pursuant to
Rule 13a-14(a) and Rule
15d-14(a) of the Securities
Exchange Act, as amended.
32 Certification of Chief Filed herewith.
Executive Officer and Chief
Financial Officer Pursuant to
18 U.S.C. 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement.
32
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused the report to be signed on its behalf by
the undersigned thereunto duly authorized.
HEARTLAND EXPRESS, INC.
Date: February 24, 2009 By: /s/ Russell A. Gerdin
---------------------
Russell A. Gerdin
Chief Executive Officer
(Principal executive officer)
By: /s/ John P. Cosaert
--------------------
John P. Cosaert
Executive Vice President of
Finance and Chief Financial
Officer
(Principal accounting and
financial 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 and Chief Executive
-----------------------
Russell A. Gerdin Officer
(Principal executive officer) February 24, 2009
/s/ Michael J. Gerdin President and Director
-----------------------
Michael J. Gerdin February 24, 2009
/s/ John P. Cosaert Executive Vice President of
-----------------------
John P. Cosaert Finance, Chief Financial
Officer, and Treasurer
(Principal accounting and
financial officer) February 24, 2009
/s/ Richard O. Jacobson Director
-----------------------
Richard O. Jacobson February 24, 2009
/s/ Benjamin J. Allen Director
-----------------------
Benjamin J. Allen February 24, 2009
/s/ Lawrence D. Crouse Director
-----------------------
Lawrence D. Crouse February 24, 2009
/s/ James G. Pratt Director
-----------------------
James G. Pratt February 24, 2009
33
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, 2008 and 2007,
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,
2008. In connection with our audits of the consolidated financial statements, we
also have audited financial statement schedule II. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Heartland Express,
Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, 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. 157,
"Fair Value Measurements", as of January 1, 2008. As discussed in Note 2 to the
consolidated financial statements, the Company adopted the provisions of
Financial Accounting Standards Board Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes", as of January 1, 2007. In addition, as discussed
in Note 2 to the consolidated financial statements, the Company changed its
method of quantifying errors in 2006.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February
24, 2009, expressed an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ KPMG LLP
Des Moines, Iowa
February 24, 2009
F-1
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, December 31,
ASSETS .................................. 2008 2007
CURRENT ASSETS
Cash and cash equivalents ............ $ 56,651 $ 7,960
Short-term investments ............... 241 186,944
Trade receivables, net of
allowance for doubtful accounts
of $775 at December 31, 2008
and 2007 ............................. 36,803 44,359
Prepaid tires ........................ 6,449 4,764
Other prepaid expenses ............... 2,834 3,391
Income tax receivable ................ -- 57
Deferred income taxes ................ 35,650 30,443
--------- ---------
Total current asset ........... $ 138,628 $ 277,918
--------- ---------
PROPERTY AND EQUIPMENT
Land and land improvements ........... 17,442 17,264
Buildings ............................ 26,761 25,413
Furniture & fixtures ................. 2,269 2,220
Shop & service equipment ............. 5,290 4,685
Revenue equipment .................... 337,799 320,776
--------- ---------
389,561 370,358
Less accumulated depreciation ........ 151,881 132,545
--------- ---------
Property and equipment, net .......... $ 237,680 $ 237,813
--------- ---------
LONG-TERM INVESTMENTS ................... 171,122 --
GOODWILL ................................ 4,815 4,815
OTHER ASSETS ............................ 5,469 5,748
--------- ---------
$ 557,714 $ 526,294
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
liabilities .......................... $ 10,338 $ 13,073
Compensation & benefits .............. 15,862 14,699
Income taxes payable ................. 452 --
Insurance accruals ................... 70,546 60,882
Other accruals ....................... 7,498 6,718
--------- ---------
Total current liabilities ..... $ 104,696 $ 95,372
--------- ---------
LONG-TERM LIABILITIES
Income taxes payable ................. $ 35,264 $ 37,593
Deferred income taxes ................ 57,715 50,570
--------- ---------
Total long-term liabilities ... $ 92,979 $ 88,163
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01;
authorized 5,000 shares; none issued -- --
Capital stock; common, $.01 par value;
authorized 395,000 shares; issued
and outstanding 94,229 in 2008
and 96,949 in 2007 ................. $ 942 $ 970
Additional paid-in capital ........... 439 439
Retained earnings .................... $ 367,281 $ 341,350
Accumulated other comprehensive loss . (8,623) --
--------- ---------
$ 360,039 $ 342,759
--------- ---------
$ 557,714 $ 526,294
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Years Ended December 31,
-----------------------------------
2008 2007 2006
--------- --------- ---------
OPERATING REVENUE ....................... $ 625,600 $ 591,893 $ 571,919
--------- --------- ---------
OPERATING EXPENSES:
Salaries, wages, and benefits ........ $ 197,992 $ 196,303 $ 189,179
Rent and purchased
transportation ..................... 18,703 21,421 24,388
Fuel ................................. 204,708 164,285 146,240
Operations and maintenance ........... 15,575 12,314 12,647
Operating taxes and licenses ......... 9,317 9,454 9,143
Insurance and claims ................. 24,307 18,110 16,621
Communications and utilities ......... 3,693 3,857 3,721
Depreciation ......................... 46,109 48,478 47,351
Other operating expenses ............. 16,807 17,380 17,356
Gain on disposal of property
& equipment ......................... (9,558) (10,159) (18,144)
--------- --------- ----------
527,653 481,443 448,502
--------- --------- ---------
Operating income ............... 97,947 110,450 123,417
Interest income ......................... 9,132 10,285 11,732
--------- --------- ---------
Income before income taxes ................ 107,079 120,735 135,149
Federal and state income taxes ............ 37,111 44,565 47,978
--------- --------- ---------
Net Income ................................ $ 69,968 $ 76,170 $ 87,171
======== ========= =========
Earnings per share ........................ $ 0.73 $ 0.78 $ 0.89
========= ========= =========
Weighted average shares
outstanding ........................... 95,900 97,735 98,359
========= ========= =========
Dividends declared per share .............. $ 0.080 $ 2.080 $ 0.075
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)
Accumu-
lated
Other
Capital Additional Compre- Unearned
Stock, Paid-In Retained hensive Compen-
Common Capital Earnings Loss Sation Total
-------- -------- -------- -------- -------- --------
Balance, January 1, 2006 ... $ 739 $ -- $432,953 $ -- $ (439) $433,253
Net income ................. -- -- 87,171 -- -- 87,171
Impact of adopting SAB 108 . -- -- (15,854) -- -- (15,854)
Dividends on common stock,
$0.075 per share ......... -- -- (7,375) -- -- (7,375)
Stock split ................ 246 -- (246) -- -- --
Stock repurchase ........... (2) -- (2,545) -- -- (2,547)
Reclassification of share
based compensation ....... -- -- (439) -- 439 --
Amortization of share based
compensation ............... -- 376 -- -- -- 376
-------- -------- -------- -------- -------- --------
Balance, December 31, 2006 . 983 376 493,665 -- -- $495,024
Net income ................. -- -- 76,170 -- -- 76,170
Impact of adopting FIN 48 .. -- -- (4,798) -- -- (4,798)
Dividends on common stock,
$2.08 per share .......... -- -- (204,312) -- -- (204,312)
Stock repurchase ........... (13) -- (19,375) -- -- (19,388)
Amortization of share
based compensation ....... -- 63 -- -- -- 63
-------- -------- -------- -------- -------- --------
Balance, December 31, 2007 . 970 439 341,350 -- -- 342,759
Comprehensive income:
Net income ............... -- -- 69,968 -- -- 69,968
Unrealized loss on
available-for-
sale securities,
net of tax ............. -- -- -- (8,623) -- (8,623)
--------
Total comprehensive income 61,345
Dividends on common stock,
$0.08 per share .......... -- -- (7,662) -- -- (7,662)
Stock repurchase ........... (28) -- (36,375) -- -- (36,403)
-------- -------- --------- -------- -------- --------
Balance, December 31, 2008 . $ 942 $ 439 $367,281 $ (8,623) $ -- $360,039
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
-----------------------------------
2008 2007 2006
--------- --------- ---------
OPERATING ACTIVITIES
Net income .............................................. $ 69,968 $ 76,170 $ 87,171
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 46,109 48,486 47,371
Deferred income taxes ................................ 2,192 494 5,101
Amortization of share based compensation ............. -- 63 376
Gain on disposal of property and equipment ........... (9,558) (10,159) (18,144)
Changes in certain working capital items:
Trade receivables .................................. 7,556 (860) (639)
Prepaid expenses and other current assets .......... (1,018) 978 (2,128)
Accounts payable, accrued liabilities, and
accrued expenses ............................... 8,383 2,731 7,609
Accrued income taxes ............................... (1,820) 2,506 1,554
--------- --------- ---------
Net cash provided by operating activities ... 121,812 120,409 128,271
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment ............ 1,849 13,228 1,966
Purchases of property and equipment, net of trades ...... (35,949) (43,579) (76,056)
Net sale (purchases) of municipal bonds ................. 6,704 133,374 (40,771)
Change in other assets .................................. 279 (207) (889)
--------- --------- ---------
Net cash (used in) provided by investing .... (27,117) 102,816 (115,750)
activities
--------- --------- ---------
FINANCING ACTIVITIES
Cash dividend ........................................ (9,601) (204,336) (6,882)
Stock repurchase ..................................... (36,403) (19,388) (2,547)
--------- --------- ---------
Net cash used in financing activities ..... (46,004) (223,724) (9,429)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .... 48,691 (499) 3,092
CASH AND CASH EQUIVALENTS
Beginning of year ....................................... 7,960 8,459 5,367
--------- --------- ---------
End of year ............................................. $ 56,651 $ 7,960 $ 8,459
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes, net $ 36,739 $ 41,564 $ 41,323
Noncash investing and financing activities:
Fair value of revenue equipment traded $ 20,991 $ 6,429 $ 45,669
Purchased property and equipment in accounts
payable at year end 2,778 459 2,638
Common stock dividends declared in accounts
payable at year end 15 1,954 1,978
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
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 and complemented this expansion into the Western United States with the
acquisition of a terminal near Dallas, Texas which opened during January 2009.
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 the consolidated financial statements in conformity with U.S.
generally accepted accounting principles ("GAAP") 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.
Segment Information:
The Company has ten regional operating divisions (eleven with the addition of
Seagoville, Texas in January 2009) in addition to our corporate headquarters;
however, it has determined that it has one reportable segment. All of the
divisions are managed based on similar economic characteristics. Each of the
regional operating divisions provides short-to medium-haul truckload carrier
services of general commodities to a similar class of customers. In addition,
each division exhibits similar financial performance, including average revenue
per mile and operating ratio. As a result of the foregoing, the Company has
determined that it is appropriate to aggregate its operating divisions into one
reportable segment, consistent with the guidance in Statement of Financial
Accounting Standards ("SFAS") No. 131. Accordingly, the Company has not
presented separate financial information for each of its operating divisions as
the Company's consolidated financial statements present its one reportable
segment.
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 $5.5 million in 2008 and
$5.7 million in 2007 are included in other non-current assets. The restricted
funds represent deposits required by state agencies for self-insurance purposes
and designated funds that are earmarked for a specific purpose and not for
general business use.
Investments:
The Company's investments are primarily in the form of tax free auction rate
educational bonds backed by the U.S. government. The investments typically have
an interest reset provision of 35 days. At the reset date the Company has the
option to roll the investment and reset the interest rate or sell the investment
in an auction. The Company receives the par value of the investment plus accrued
interest on the reset date if the underlying investment is sold. Primarily all
of these investments have AAA (or equivalent) ratings from recognized rating
agencies. These investments are reported at fair value and reviewed for
impairment as deemed necessary. Interest income is accrued as earned and accrued
interest is included in other current assets in the consolidated balance sheet.
F-6
Investment income received is generally exempt from federal income taxes.
The Company determines the appropriate classification of the securities at the
time they are acquired and evaluates the appropriateness of such classification
at each balance sheet date. The Company has classified its investment in auction
rate securities as available-for-sale. Available-for-sale securities are stated
at fair value, and unrealized holding gains and losses, net of the related
deferred tax effect, are reported as a component of stockholders' equity.
Realized gains and losses are determined on the basis of the specific securities
sold. See Note 5 for further discussion of fair value measurements of
investments.
Trade Receivables and Allowance for Doubtful Accounts:
Revenue is recognized when freight is delivered creating a credit sale and an
account receivable. Credit terms for customer accounts are typically on a net 30
day basis. The Company uses a percentage of aged receivable method and its write
off history 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 receivable as is practical under the law.
Property, Equipment, and Depreciation:
Property and equipment are reported at cost, net of accumulated depreciation,
while maintenance and repairs are charged to operations as incurred. Tires are
capitalized separately from revenue equipment and are reported separately as
"Prepaid Tires" and amortized over two years.
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 3-5
Shop & service equipment 3-10
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.
Advertising expense was $1.7 million, $2.3 million, and $3.0 million for the
years ended December 31, 2008, 2007 and 2006.
Goodwill:
Goodwill is tested at least annually for impairment by applying a fair value
based analysis in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets". The Company's annual assessment is conducted as of
September 30th and no other indicators requiring assessment were identified
during the period from this assessment through year-end. Management determined
that no impairment charge was required for the years ended December 31, 2008,
2007 and 2006.
Self -Insurance 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 and loss adjustment expenses incurred but not
reported, and 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.
F-7
Revenue and Expense Recognition:
Revenue, drivers' wages and other direct operating expenses are recognized when
freight is delivered. Sales taxes and other taxes collected from customers and
remitted to the government are recorded on a net basis. Fuel surcharge revenue
charged to customers is included in operating revenue and amounted to $130.8
million, $86.6 million and $81.4 million in 2008, 2007, and 2006 respectively.
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.
Share-Based Compensation:
The Company recorded share-based compensation arrangements in accordance with
SFAS No. 123 (revised 2004), "Share-Based Payment." This standard requires that
share-based transactions be accounted for and recognized in the consolidated
statement of income based on their fair value. As of December 31, 2008, the
Company does not have any outstanding share-based awards and does not plan on
any additional share-based programs. See details of the previous program at Note
9.
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. Recoverability of assets to be held and
used is evaluated by a comparison of the carrying amount of an asset group to
future net undiscounted cash flows expected to be generated by the group. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount over which the carrying amount of the assets exceeds the
fair value of the assets. There were no impairment charges recognized during the
years ended December 31, 2008, 2007, and 2006.
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 temporary differences between the financial
statements carrying amount of existing assets and liabilities and their
respective tax 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. Such
amounts are adjusted, as appropriate, to reflect changes in tax rates expected
to be in effect when the temporary differences reverse. The effect of a change
in tax rates on deferred taxes is recognized in the period that the change in
enacted. A valuation allowance is recorded to reduce the Company's deferred tax
assets to the amount that is more likely than not to be realized.
Pursuant to SFAS No. 109, "Accounting for Income Taxes", when establishing a
valuation allowance, the Company considers future sources of taxable income such
as "future reversals of existing taxable temporary differences and
carryforwards" and "tax planning strategies". In the event the Company
determines that the deferred tax assets will not be realized in the future, the
valuation adjustment to the deferred tax assets is charged to earnings or
accumulated other comprehensive loss based on the nature of the asset giving
rise to the deferred tax asset and the facts and circumstances resulting in that
conclusion.
The Company calculates its current and deferred tax provision based on estimates
and assumptions that could differ from the actual results reflected in income
tax returns filed in subsequent years. Adjustments based on filed returns are
recorded when identified.
Beginning with the adoption of Financial Accounting Standards Board ("FASB")
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48), as
of January 1, 2007, the Company recognizes the effect of income tax positions
only if those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater than 50%
likely of being realized. Changes in recognition or measurement are reflected in
F-8
the period in which the change in judgment occurs. Prior to the adoption of FIN
48, the Company recognized the effect of income tax positions only if such
positions were probable of being sustained. The Company records interest and
penalties related to unrecognized tax benefits in income tax expense.
New Accounting Pronouncements:
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R") and SFAS Statement No. 160, "Noncontrolling Interests in Consolidated
Financial Statements - an amendment to ARB No. 51" ("SFAS 160") (collectively,
"the Statements"). The Statements require most identifiable assets, liabilities,
noncontrolling interests, and goodwill acquired in a business combination to be
recorded at "full fair value" and require noncontrolling interests (previously
referred to as minority interests) to be reported as a component of equity,
which changes the accounting for transactions with noncontrolling interest
holders. The Statements are effective for periods beginning on or after December
15, 2008, and earlier adoption is prohibited. SFAS 141R will be applied to
business combinations occurring after the effective date. SFAS 160 will be
applied prospectively to all noncontrolling interests, including any that arose
before the effective date. The Company is currently evaluating the impact of
adopting the Statements on its results of operations and financial position.
On March, 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an Amendment of FASB Statement No. 133",
("SFAS 161") which amends FASB Statement No. 133 ("SFAS 133") by requiring
expanded disclosures about an entity's derivative instruments and hedging
activities, but does not change SFAS 133's scope or accounting. SFAS 161
requires qualitative, quantitative, and credit-risk disclosures. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. As the Company has entered into a derivative
instrument subsequent to December 31, 2008 (See Note 13), the Company will be
required to comply with the expanded disclosures of SFAS 161 with its first
quarter 2009 interim financial statements for the period ending March 31, 2009.
On May 9, 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles" ("SFAS No. 162") which reorganizes the generally
accepted accounting principles ("GAAP") hierarchy as detailed in the statement.
The purpose of the new standard is to improve financial reporting by providing a
consistent framework for determining what accounting principles should be used
when preparing U.S. GAAP financial statements. SFAS No. 162 became effective on
November 15, 2008. The Company does not expect the adoption of SFAS No. 162 to
effect the financial position, results of operations or cash flows of the
Company.
2. Adopted Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value Measurements ("SFAS
157"). SFAS 157 became effective for the Company on January 1, 2008. SFAS No.
157 defines fair value, specifies a hierarchy of valuation techniques based on
whether the inputs to those valuation techniques are observable or unobservable,
and enhances disclosures about fair value measurements. Observable inputs are
inputs that reflect market data obtained from sources independent of the Company
and unobservable inputs are inputs based on the Company's own assumptions based
on best information available in the circumstances. The two sources of these
inputs are used in applying the following fair value hierarchy:
o Level 1 - quoted prices in active markets for identical assets or
liabilities.
o Level 2 - quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities
in markets that are not active; modeling with inputs that have
observable inputs (i.e. interest rates observable at commonly quoted
intervals.
o Level 3 - valuation is generated from model-based techniques that use
significant assumptions not observable in the market
Under SFAS 157, where applicable GAAP literature requires the use of fair value,
the Company must value assets and liabilities at the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In October,
2008 the FASB issued Staff Position No. 157-3, "Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active", ("SOP 157-3") and
was effective as of the date of issuance including periods for which financial
statements had not yet been issued. SOP 157-3 specifically provides guidance
regarding the considerations necessary when markets are inactive. The guidance
indicates that quotes from brokers or pricing services may be relevant inputs
when measuring fair value, but are not necessarily determinative in the absence
of an active market for the asset.
F-9
Application of SFAS 157 for fair value measurements is primarily related to the
valuation of investments as discussed in Note 5. There may be inherent
weaknesses in any calculation technique, and changes in the underlying
assumptions used, including discount rates and estimates of future cash flows,
that could significantly affect the results of current or future values. See
Note 5 for further discussion of the Company's adoption and application of SFAS
157 and SOP 157-3 for the year ended December 31, 2008. The adoption of SFAS 157
and SOP 157-3 did not have any impact on income from operations, net income, or
related earnings per share and reduced stockholders' equity $8.6 million for the
year ended December 31, 2008.
In 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" ("SFAS No. 159"), which provides the Company
the option to measure many financial instruments and certain other items at fair
value that are not currently required or permitted to be measured at fair value.
SFAS No. 159 was effective for the Company January 1, 2008. The Company chose to
adopt this guidance for certain financial assets, however, the adoption did not
materially effect the financial position, results of operations, and cash flows
of the Company.
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". The Company implemented SFAS No. 123R on January 1, 2006. The
unamortized portion of unearned compensation was reclassified to retained
earnings upon adoption. The amortization of unearned compensation was recorded
as additional paid-in capital, and all remaining unearned compensation was
amortized as of December 31, 2007. The implementation of SFAS No. 123R had no
effect on the Company's results of operations for the twelve months ended
December 31, 2008, 2007 and 2006.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB 108), to address
diversity in practice in quantifying financial statement misstatements. SAB 108
requires an entity to quantify misstatements using a balance sheet and income
statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. SAB 108 was effective as of the beginning of the Company's
2006 fiscal year, allowing a one-time transitional cumulative effect adjustment
to retained earnings as of January 1, 2006 for errors that were not previously
deemed material, but are material under the guidance in SAB 108. The Company
adopted the provisions of SAB No. 108 and recorded a $15.9 million cumulative
adjustment to the January 1, 2006 retained earnings for a previously unrecorded
state income tax exposure liability and related deferred tax liability. The
amount recorded pertains to potential state income tax liabilities for the years
1996 through 2005 and the impact on deferred tax liabilities for those same
years. These errors were considered immaterial under the Company's previous
method of evaluating misstatements.
In June 2006, the FASB issued FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109) ("FIN
48"), which was effective for fiscal years beginning after December 15, 2006.
This interpretation was issued to clarify the accounting for uncertainty in
income taxes recognized in the financial statements by prescribing a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The
Company recorded a cumulative adjustment of approximately $4.8 million to
decrease the January 1, 2007 retained earnings upon adoption as allowed under
the interpretation's transition provisions.
3. Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation. These reclassifications did not have a material effect on the
Company's financial position, operating income, net income or cash flows for the
year ended December 31, 2007 and 2006. In the consolidated balance sheet as of
December 31, 2008, the Company classified accrued interest on auction rate
securities as other current assets. The Company previously presented accrued
interest on auction rate securities as short-term investments. In the
consolidated balance sheet as of December 31, 2007, the Company reclassified
$1.7 million from short-term investments to other current assets. In the
consolidated statement of cash flows for the years ended December 31, 2007 and
2006, the Company reclassified $0.8 and $0.2 million, respectively, from
investing activities as a component of net sales (purchases) of investments, to
operating activities as a component of changes in other current assets.
4. Concentrations of Credit Risk and Major Customers
The Company's major customers represent the consumer goods, appliances, food
products and automotive industries. Credit is granted to customers on an
F-10
unsecured basis. The Company's five largest customers accounted for 36% of total
gross revenues for the year ended December 31, 2008 and 36% and 35% for the
years ended December 31, 2007 and 2006, respectively. Operating revenue from one
customer exceeded 10% of total gross revenues in 2008, 2007, and 2006. Annual
revenues for this customer were $73.9 million, $77.1 million, and $79.5 million,
for the years ended December 31, 2008, 2007, and 2006, respectively.
5. Investments
The Company's investments are primarily in the form of tax free, auction rate
student loan educational bonds backed by the U.S. government and are classified
as available-for-sale. As of December 31, 2008, all of the Company's $171.1
million long-term investment balance was invested in auction rate student loan
educational bonds. The investments typically have an interest reset provision of
35 days with contractual maturities that range from 6 to 39 years as of December
31, 2008. At the reset date the Company has the option to roll the investments
and reset the interest rate or sell the investments in an auction. The Company
receives the par value of the investment plus accrued interest on the reset date
if the underlying investment is sold. The majority, (approximately 96.1% at par)
of the underlying investments is backed by the U.S. government and continues to
hold AAA (or equivalent) ratings from recognized rating agencies. The remaining
3.9% of the student loan auction rate securities portfolio hold AA ratings and
were insurance backed securities.
During the quarter ended March 31, 2008 the Company began experiencing failures
in the auction process of auction rate securities held by the Company. As of
December 31, 2008, all of the Company's auction rate securities were associated
with unsuccessful auctions. Based on the unsuccessful auctions that began during
February 2008 and continued through December 31, 2008, the Company reclassified
these investments to long-term investments. In addition, the Company recorded an
adjustment to fair value to reflect the lack of liquidity in these securities as
discussed in more detail below. To date, there have been no instances of
delinquencies or non-payment of applicable interest from the issuers and all
partial calls of securities by the issuers have been at par value plus accrued
interest. Investment income received is generally exempt from federal income
taxes and is accrued as earned. Accrued interest income is included in other
current assets in the consolidated balance sheet.
The Company was required to estimate the fair value of the auction rate
securities applying the guidance in SFAS No. 157, which became effective for the
Company as of January 1, 2008. Fair value represents an estimate of what the
Company could sell the investments for in an orderly transaction with a third
party as of the December 31, 2008 measurement date although it is not the intent
of the Company to sell such securities at discounted pricing. Historically, the
fair value of such investments was reported based on amortized cost. Until
auction failures began, the fair value of these investments were calculated
using Level 1 observable inputs per SFAS 157 and fair value was deemed to be
equivalent to amortized cost due to the short-term and regularly occurring
auction process. Based on auction failures beginning in mid-February 2008 and
continued failures through December 31, 2008, there were not any observable
quoted prices or other relevant inputs for identical or similar securities.
Estimated fair value of all auction rate security investments as of December 31,
2008 was calculated using unobservable, Level 3 inputs, as defined by SFAS 157
due to the lack of observable market inputs specifically related to student loan
auction rate securities. The fair value of these investments as of the December
31, 2008 measurement date could not be determined with precision based on lack
of observable market data and could significantly change in future measurement
periods. There were no unrealized gains (losses) recorded upon the adoption of
SFAS 157 as of January 1, 2008 and all the unrealized losses as of December 31,
2008, included in other accumulated comprehensive loss, relate to the Company's
investment in auction rate student loan educational bonds.
The estimated fair value of the underlying investments as of December 31, 2008
declined below amortized cost of the investments, as a result of liquidity
issues in the auction rate markets. With the assistance of the Company's
financial advisors, fair values of the student loan auction rate securities were
estimated, on an individual investment basis, using a discounted cash flow
approach to value the underlying collateral of the trust issuing the debt
securities considering an anticipated estimated outstanding average life of the
underlying student loans (range of two to ten years) that are the collateral to
the trusts, principal outstanding, expected rates of returns, and payout
formulas. These underlying cash flows, by individual investment, were discounted
using interest rates consistent with instruments of similar quality and duration
with an adjustment for a higher required yield for lack of liquidity in the
market for these auction rate securities (range of 1.0%-8.4%). The Company
obtained an understanding of assumptions in models used by third party financial
institutions to estimate fair value and considered these assumptions in the
Company's cash flow models but did not exclusively use the fair values provided
by financial institutions based on their internal modeling. The Company is aware
that trading of student loan auction rate securities is occurring in secondary
markets, which were considered in the Company's fair value assessment, although
the Company has not listed any of its assets for sale on the secondary market.
As a result of the fair value measurements, the Company recognized an unrealized
loss and reduction to investments, of $8.6 million, net of tax, during the
F-11
twelve month period ended December 31, 2008. There was not any unrealized loss
on investments as of December 31, 2007 as the auctions had functioned regularly
through that date. The unrealized loss of $8.6 million, net of tax, was recorded
as an adjustment to other accumulated comprehensive loss. The fair value
adjustment did not have any impact on the Company's consolidated statement of
income for the year ended December 31, 2008. There were not any realized gains
or losses related to these investments for the years ending December 31, 2008,
2007 and 2006 other than related to the settlement agreement discussed below.
During the third and fourth quarters of 2008, various financial institutions and
respective regulatory authorities announced proposed settlement terms in
response to various regulatory authorities alleging certain financial
institutions misled investors regarding the liquidity risks associated with
auction rate securities that the respective financial institutions underwrote,
marketed and sold. Further the respective regulatory authorities alleged the
respective financial institutions misrepresented to customers that auction rate
securities were safe, highly liquid investments that were comparable to money
markets. Certain settlement agreements were finalized prior to December 31,
2008. In general, approximately 96.1% (at par value) of our auction rate
security investments were not covered by the terms of the above mentioned
settlement agreements. The focus of the initial settlements was generally
towards individuals, charities, and businesses with small investment balances,
generally holdings of $25 million and less. As part of the general terms of the
settlements, the respective financial institutions have agreed to provide their
best efforts in providing liquidity to the auction rate securities market for
investors not specifically covered by the terms of the respective settlements.
Such liquidity solutions could be in the form of facilitating issuer
redemptions, resecuritizations, or other means. The Company can not currently
project when liquidity will be obtained from these investments, and plans to
continue to hold such securities until the securities are called, redeemed, or
resecuritized by the debt issuers.
The remaining 3.9% (at par value) was specifically covered by a settlement
agreement which the Company signed during the fourth quarter of 2008. By signing
the settlement agreement the Company relinquished its rights to bring any claims
against the financial institution as well as its right to serve as a class
representative or receive benefits under any class action. Further, the Company
no longer has the sole discretion and right to sell or otherwise dispose of,
and/or enter orders in the auction process with respect to the underlying
securities. As part of the settlement, the Company obtained a put option to sell
the underlying securities to the financial institution which is exercisable
during the period starting on June 30, 2010 through July 2, 2012 plus accrued
interest. Should the financial institution sell or otherwise dispose of our
securities the Company will receive the par value of the securities plus accrued
interest one business day after the transaction. Upon signing the settlement
agreement the Company no longer maintains the intent and ability to hold the
underlying securities for recovery of the temporary decline in fair value. The
Company also acquired an asset, a put option that is to be valued as a stand
alone financial instrument separate from the underlying securities. The amount
deemed as a loss due to temporary impairment of securities was not materially
different from the amount of the gain recorded to recognize the fair value of
the put option acquired as part of the settlement. As such, there was not any
material impact to the Company's consolidated statement of income for the
signing of this settlement agreement. The estimated fair value of the put option
combined with the estimated fair value of the underlying securities, as of
December 31, 2008 is par value of the securities. The par value of these
securities is included in long-term investments per the consolidated balance
sheet.
The Company has evaluated the unrealized loss, on securities other than
securities covered by the settlement agreement discussed above to determine
whether this decline is other than temporary. Management has concluded the
decline in fair value to be temporary based on the following considerations.
o Current market activity and the lack of severity or extended decline
do not warrant such action at this time.
o During June 2008, the Company received $1.1 million as the result of a
partial call by an issuer. The Company received par value for the
amount of the call plus accrued interest.
o During third quarter of 2008, the Company received $8.0 million in
calls by the underlying issuers. The Company received par value for
the amount of the call plus accrued interest.
o During the fourth quarter of 2008, the Company received $9.5 million
in calls by the underlying issuers. The Company received par value for
the amount of the call plus accrued interest.
o Based on the Company's financial operating results, operating cash
flows and debt free balance sheet, the Company has the ability and
intent to hold such securities until recovery of the unrealized loss.
o There have not been any significant changes in collateralization and
ratings of the underlying securities since the first failed auction.
The Company continues to hold 96.1% of the auction rate security
portfolio in senior positions of AAA (or equivalent) rated securities.
F-12
o The Company is not aware of any changes in default rates of the
underlying student loans that are the assets to the trusts issuing the
auction rate security debt.
o Currently there is legislative pressure to provide liquidity in
student loan investments, providing liquidity to state student loan
agencies, to continue to provide financial assistance to eligible
students to enable higher educations. This has the potential to impact
existing securities with underlying student loans.
o As individual trusts that are the issuers of the auction rate student
loan debt, which the Company holds, continue to pay higher default
rates of interest, there is the potential that the underlying trust
would seek alternative financing and call the existing debt at which
point it is estimated the Company would receive par value of the
investment.
o All of the auction rate securities are held with financial
institutions that have agreed in principle to settlement agreements
with various regulatory agencies to provide liquidity. Although the
principles of the respective settlement agreements focus mostly on
small investors (generally companies and individual investors with
auction rate security assets less than $25 million), the respective
settlements state the financial institutions will work with issuers
and other interested parties to use their best efforts to provide
liquidity solutions to companies not specifically covered by the
principle terms of the respective settlements by the end of 2009 in
certain settlement agreements.
In addition to the items noted above, the Company has the intent and ability to
hold these investments until recovery, therefore there was not any other than
temporary impairment recorded on these investments. Management will monitor its
investments and ongoing market conditions in future periods to assess
impairments considered to be other than temporary. Should estimated fair value
continue to remain below cost or the fair value decrease significantly from
current fair value due to credit related issues, the Company may be required to
record an impairment of these investments, through a charge in the consolidated
statement of income.
The table below presents a reconciliation for all assets and liabilities
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) during the year ended December 31, 2008.
Available-for-sale
Level 3 Fair Value Measurements debt securities (1)
(in thousands)
Balance, December 31, 2007 $ --
Purchases, sales, issuances, and settlements (6,682)
Transfers in to Level 3 186,427
Total gains or losses (realized/unrealized):
Included in net income --
Included in other comprehensive loss, net of tax (8,623)
-------------
Balance, December 31, 2008 $ 171,122
=============
(1) Available-for-sale auction rate securities had observable market inputs
and were valued at amortized cost at December 31, 2007 based on regular,
successful auctions. Based on unsuccessful auctions during the year ended
December 31, 2008, the fair value of these securities was changed to modeling
techniques, as described previously, using unobservable market inputs.
The amortized cost and fair value of investments at December 31, 2008 and
December 31, 2007 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2008: (in thousands)
Current:
Municipal bonds $ 241 $ - $ - $ 241
Long-term:
Auction rate student loan
educational bonds 180,000 - (8,878) 171,122
--------- ---------- --------- ---------
$ 180,241 $ - $ (8,878) $ 171,363
========= ========== ========= =========
F-13
December 31, 2007:
Current:
Municipal bonds $ 517 $ - $ - $ 517
Auction rate student loan
educational bonds 186,427 - - 186,427
--------- ---------- --------- ---------
$ 186,944 $ - $ - $ 186,944
========= ========== ========= =========
The contractual maturities of the available-for-sale securities at December 31,
2008 are as follows:
Due within one-year $ 241
Due after one year through five years -
Due after five years through ten years 2,961
Due after ten years through September 1, 2047 168,161
------------
$ 171,363
============
6. 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 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.
Deferred tax assets and liabilities as of December 31 are as follows:
2008 2007
--------- ---------
(in thousands)
Deferred income tax assets:
Allowance for doubtful accounts $ 292 $ 305
Accrued expenses 6,837 6,548
Insurance accruals 28,187 23,941
Unrealized loss on available-for-sale
investments 3,108 -
Indirect tax benefits of FIN48 tax accruals 8,037 8,987
Other 80 (351)
--------- ---------
Total gross deferred tax assets 46,541 39,430
Less valuation allowance (2,854) -
--------- ---------
Net deferred tax assets 43,687 39,430
--------- ---------
Deferred income tax liabilities:
Property and equipment (65,752) (59,557)
--------- ---------
Net deferred tax liability $ (22,065) $ (20,127)
========= =========
The Company has recorded a valuation allowance of $2.9 million related to the
Company's deferred tax asset associated specifically with the write-down of
auction rate securities to fair market value. This valuation allowance was
recorded as the Company does not have historical capital gains nor does it
expect to generate capital gains sufficient to utilize the entire deferred tax
asset generated by the fair value adjustment. As the fair value adjustment was
recorded through accumulated other comprehensive loss, the associated valuation
allowance was also recorded through accumulated other comprehensive loss. The
above mentioned allowance did not impact the consolidated statement of income
for the year ended December 31, 2008. The Company has not recorded a valuation
allowance against any other deferred tax assets. In management's opinion, it is
more likely than not that the Company will be able to utilize these deferred tax
assets in future periods as a result of the Company's history of profitability,
taxable income, and reversal of deferred tax liabilities.
F-14
The income tax provision is as follows:
2008 2007 2006
--------- --------- ---------
Current income taxes: (in thousands)
Federal $ 31,445 $ 37,800 $ 35,821
State 3,474 6,271 7,056
--------- --------- ---------
34,919 44,071 42,877
--------- --------- ---------
Deferred income taxes:
Federal 2,197 (746) 4,758
State (5) 1,240 343
--------- --------- ---------
2,192 494 5,101
--------- --------- ---------
Total $ 37,111 $ 44,565 $ 47,978
========= ========= =========
The income tax provision differs from the amount determined by applying the U.S.
federal tax rate as follows:
2008 2007 2006
--------- --------- ---------
(in thousands)
Federal tax at statutory rate (35%) $ 37,478 $ 42,257 $ 47,302
State taxes, net of federal benefit 2,019 5,515 4,809
Non-taxable interest income (2,884) (3,451) (4,039)
Other 498 244 (94)
--------- --------- ---------
$ 37,111 $ 44,565 $ 47,978
========= ========= =========
As stated in Note 2 above, the Company adopted SAB 108 by recording a $15.9
million cumulative adjustment to retained earnings during the year ended
December 31, 2006. The Company adjusted retained earnings due to a previously
unrecorded state income tax exposure liability of $11.8 million and related
increase in the deferred tax liability of $4.1 million.
The Company recognized additional tax liabilities of $4.8 million with a
corresponding reduction to beginning retained earnings as of January 1, 2007 as
a result of the adoption of FIN 48. The total amount of gross unrecognized tax
benefits was $25.2 million as of January 1, 2007, the date of adoption and $25.7
million at December 31, 2007. At December 31, 2008, the Company had a total of
$22.9 million in gross unrecognized tax benefits. Of this amount, $14.9 million
represents the amount of unrecognized tax benefits that, if recognized, would
impact our effective tax rate. Unrecognized tax benefits were a net decrease of
approximately $2.7 million during the year ended December 31, 2008, due mainly
to the expiration of certain statutes of limitation net of additions. This had
the effect of reducing the effective state tax rate during 2008. The total net
amount of accrued interest and penalties for such unrecognized tax benefits was
$12.3 million at December 31, 2008 and $11.9 million at December 31, 2007 and is
included in income taxes payable. Net interest and penalties included in income
tax expense for the twelve month period ended December 31, 2008 was an
additional tax expense of approximately $0.4 million. Net interest and penalties
included in income tax expense for the twelve month period ended December 31,
2007 was an additional tax expense of $1.5 million. These unrecognized tax
benefits relate to risks associated with state income tax filing positions for
the Company's corporate subsidiaries.
A reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
(in thousands)
Balance at December 31, 2007 $ 25,676
Additions based on tax positions related to current year 300
Additions for tax positions of prior years 145
Reductions for tax positions of prior years -
Reductions due to lapse of applicable statute of limitations (3,136)
Settlements -
------------
Balance at December 31, 2008 $ 22,985
============
F-15
A number of years may elapse before an uncertain tax position is audited and
ultimately settled. It is difficult to predict the ultimate outcome or the
timing of resolution for uncertain tax positions. It is reasonably possible that
the amount of unrecognized tax benefits could significantly increase or decrease
within the next twelve months. These changes could result from the expiration of
the statute of limitations, examinations or other unforeseen circumstances. As
of December 31, 2008, the Company did not have any ongoing examinations or
outstanding litigation related to tax matters although there will be a state
examination conducted during 2009. At this time, management's best estimate of
the reasonably possible change in the amount of gross unrecognized tax benefits
to be a decrease of approximately $3.0 to $4.0 million during the next twelve
months mainly due to the expiration of certain statute of limitations. The
federal statute of limitations remains open for the years 2005 and forward. Tax
years 1998 and forward are subject to audit by state tax authorities depending
on the tax code of each state.
7. Related Party Transactions
Prior to moving into the new corporate headquarters in July 2007, the Company
leased two office buildings and a storage building from its chief executive
officer under a lease which provided for monthly rentals of approximately $0.03
million plus the payment of all property taxes, insurance and maintenance, which
are reported in the Company's consolidated financial statements. The lease was
renewed for a five year term on June 1, 2005 increasing the monthly rental from
approximately $0.025 million to approximately $0.03 million. The lease was
terminated in July 2007 with no penalties for early termination. During 2008 the
Company rented storage space from its chief executive officer on a
month-to-month lease. The rental space was no longer rented as of September 30,
2008. In the opinion of management, the rates paid are comparable to those that
could be negotiated with a third party. There were not any amounts due and
outstanding under these leases as of December 31, 2008 and 2007.
Rent expense paid to the Company's chief executive officer for the years ended
December 31, 2008, 2007 and 2006 was $0.04 million, $0.1 million, and $0.3
million, respectively. Rent expense is included in rent and purchased
transportation per the consolidated statements of income.
During the first quarter of 2006, the Company purchased 16.7 acres of land in
North Liberty from the Company's chief executive officer for $1.25 million. The
purchase price was based on the fair market value that could be obtained from an
unrelated third party on an arm's length basis. The transaction was approved by
the Board of Directors.
The Company acquired a new corporate headquarters and shop facility from its
chief executive officer on July 12, 2007 for $15.4 million. This amount
represents the actual cost of the facilities. This transaction was consummated
to facilitate a like-kind exchange for the benefit of the Company and was
approved by the Board of Directors.
8. 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 $0.5 million to $1.0 million for
each claim occurring on or after 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 $0.5 million to $1.0 million for each claim occurring on or after
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 $0.7 million 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 $2.5 million in connection with its liability and workers'
compensation insurance arrangements. There were no outstanding balances due on
the letters of credit at December 31, 2008 or 2007.
Accident and workers' compensation accruals include the estimated settlements,
settlement expenses and an estimate for claims incurred but not yet reported for
F-16
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. These accruals are recorded on an undiscounted basis.
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 in the current period.
9. Stockholders' Equity
On April 20, 2006, the Board of Directors approved a four-for-three stock split,
affected in the form of a 33 percent stock dividend. The stock split occurred on
May 15, 2006, to shareholders of record as of May 5, 2006. This stock split
increased the number of outstanding shares to 98.4 million from 73.8 million.
The number of common shares issued and outstanding and all per share amounts
reflect the stock split for all periods presented.
In September, 2001, the Board of Directors of the Company authorized a program
to repurchase 15.4 million shares, adjusted for stock splits after the approval,
of the Company's common stock in open market or negotiated transactions using
available cash and cash equivalents. In 2008, 2007 and 2006, respectively, 2.7
million, 1.3 million, and 0.2 million shares were repurchased in the open market
and pursuant to a trade plan under Rule 10b5-1, and retired. The authorization
to repurchase remains open at December 31, 2008 and has no expiration date.
Approximately 9.6 million shares remain authorized for repurchase under the
Board of Director's approval.
On March 7, 2002, the principal stockholder awarded approximately 0.2 million
shares of his common stock to key employees of the Company. These shares had a
fair market value of $11.00 per share on the date of the award. The shares
vested over a five-year period subject to restrictions on transferability and to
forfeiture in the event of termination of employment. Any forfeited shares were
returned to the principal stockholder. The fair market value of these shares,
approximately $2.0 million on the date of the award, was treated as a
contribution of capital and was amortized on a straight-line basis over the five
year vesting period as compensation expense (see Note 2). Compensation expense
of approximately $0.01 million and $0.4 million was recognized for the years
ended December 31, 2007 and 2006 respectively and there was no such expense for
the year ended December 31, 2008. 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 no shares
forfeited during the years ended December 31, 2008, 2007 and 2006.
During the years ended December 31, 2008, 2007 and 2006 the Company's Board of
Directors declared regular quarterly dividends totaling $7.6 million, $7.8
million and $7.4 million, respectively. The Company paid a one-time special
dividend of $196.5 million during the second quarter of 2007. Future payment of
cash dividends and the amount of such dividends will depend upon financial
conditions, results of operations, cash requirements, tax treatment, and certain
corporate law requirements, as well as factors deemed relevant by our Board of
Directors.
10. 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
$1.3, million, $1.4 million, and $1.4 million, for the years ended December 31,
2008, 2007, and 2006, respectively.
11. Commitments and Contingencies
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 consolidated financial statements.
During 2008 the Company entered into a commitment for a tractor fleet upgrade.
The commitment is expected to include the purchase of approximately 1,600 new
tractors at a total estimated purchase commitment, net of trade value of traded
tractors of approximately $80 million. The delivery of the equipment began
during the quarter ended September 30, 2008 and is expected to continue
F-17
throughout 2009. As of December 31, 2008 the Company had approximately $55
million of this net commitment remaining of which the Company had $2.3 million
of equipment purchases recorded in accounts payable and accrued liabilities
related to unpaid delivered equipment. The remaining net commitment of $52.7
million relates to undelivered equipment as of December 31, 2008. There were not
any other purchase commitments at December 31, 2008.
12. Quarterly Financial Information (Unaudited)
First Second Third Fourth
--------- --------- --------- ----------
(In Thousands, Except Per Share Data)
Year ended December 31, 2008
Operating revenue $ 149,049 $ 164,592 $ 169,935 $ 142,024
Operating income 19,759 20,910 28,621 28,657
Income before income taxes 22,622 23,146 30,564 30,746
Net income 14,663 17,231 18,723 19,352
Earnings per share 0.15 0.18 0.19 0.20
Year ended December 31, 2007
Operating revenue $ 143,429 $ 149,103 $ 146,575 $ 152,786
Operating income 31,288 28,070 26,509 24,583
Income before income taxes 34,604 30,976 28,250 26,905
Net income 22,553 19,841 17,145 16,631
Earnings per share 0.23 0.20 0.18 0.17
13. Subsequent Events
Subsequent to December 31, 2008, the Company has repurchased approximately 1.8
million shares of common stock for an aggregate purchase price of approximately
$23.9 million.
Subsequent to December 31, 2008 the Company has contracted with an unrelated
third party to hedge forecasted future cash flows related to fuel purchases
associated with fuel consumption not covered by fuel surcharge agreements. The
hedged forecasted future cash flows was transacted through the use of certain
swap investments. The Company has implemented the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", ("SFAS 133"), and has designated such hedges as cash
flow hedges. Under the guidance of SFAS 133, the Company will record an asset or
liability for the fair value of the hedging instrument each reporting period
with the change in the effective portion of the hedging instrument (as defined
by SFAS 133) included in other comprehensive income (loss) and any ineffective
portion of the hedging instrument (as defined by SFAS 133) recognized in the
statement of income as a component of fuel expense. The hedging strategy was
implemented mainly to reduce the Company's exposure to significant upward
movements in diesel fuel prices related to fuel consumed by empty and
out-of-route miles and truck engine idling time which is not recoverable through
fuel surcharge agreements.
F-18
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In Thousands, Except Per Share Data)
Column A Column B Column C Column D Column E
--------------------------------------------------------------------------------
Charges To
--------------------
Balance At Cost Balance
at
Beginning And Other Deduc- End of
Description of Period Expense Accounts tions Period
--------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended December 31, 2008 $ 775 $ 192 $ - $ 192 $ 775
Year ended December 31, 2007 775 44 - 44 775
Year ended December 31, 2006 775 221 - 221 775
S-1
Exhibit No. 21
Subsidiaries of the Registrant
State of Incorporation
Heartland Express, Inc. Parent NV
A & M Express, Inc. Subsidiary TN
Heartland Express, Inc. of Iowa Subsidiary IA
Heartland Express Maintenance Services, Inc. Subsidiary IA
Heartland Express Services, Inc. Subsidiary IA
Exhibit No. 31.1
Certification
I, Russell A. Gerdin, Chairman 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 most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 24, 2009
By: /s/ Russell A. Gerdin
Russell A. Gerdin
Chairman and
Chief Executive Officer
(Principal Executive Officer)
Exhibit No. 31.2
Certification
I, John P. Cosaert, Executive Vice President, Chief Financial Officer, and
Treasurer of Heartland Express, Inc., certify that:
1. I have reviewed this 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 most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 24, 2009
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, 2008, fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
that the information contained in such Annual Report on Form 10-K fairly
presents, in all material respects, the financial condition and results of
operations of Heartland Express, Inc.
Dated: February 24, 2009 By: /s/ Russell A. Gerdin
-----------------------
Russell A. Gerdin
Chairman 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, 2008, fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
that the information contained in such Annual Report on Form 10-K fairly
presents, in all material respects, the financial condition and results of
operations of Heartland Express, Inc.
Dated: February 24, 2009 By: /s/ John P. Cosaert
--------------------
John P. Cosaert
Executive Vice President-Finance
and Chief Financial Officer