UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 2008 Commission File No. 0-15087
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HEARTLAND EXPRESS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 93-0926999
------ ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
901 North Kansas Avenue, North Liberty, Iowa 52317
-------------------------------------------- -----
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (319) 626-3600
---------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, 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]
At June 30, 2008, there were 96,157,633 shares of the Company's $0.01 par value
common stock outstanding.
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2008 (unaudited) and December 31, 2007 1
Consolidated Statements of Income
for the Three and Six Months Ended
June 30, 2008 and 2007 (unaudited) 2
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 2008 (unaudited) 3
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 2008 and 2007 (unaudited) 4
Notes to Consolidated Financial Statements 5-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20-21
Item 4. Controls and Procedures 21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, December 31,
ASSETS 2008 2007
--------- ---------
CURRENT ASSETS (Unaudited)
Cash and cash equivalents ........................... $ 27,753 $ 7,960
Short-term investments .............................. 460 186,944
Trade receivables, net of allowance
for doubtful accounts of $944 at
June 30, 2008 and $775 at
December 31, 2007 ................................. 53,036 44,359
Prepaid tires ....................................... 4,760 4,764
Other current assets ................................ 5,976 3,391
Income tax receivable ............................... -- 57
Deferred income taxes ............................... 32,578 30,443
--------- ---------
Total current assets ...................... 124,563 277,918
--------- ---------
PROPERTY AND EQUIPMENT
Land and land improvements .......................... 17,264 17,264
Buildings ........................................... 25,430 25,413
Furniture & fixtures ................................ 2,269 2,220
Shop & service equipment ............................ 4,699 4,685
Revenue equipment ................................... 317,890 320,776
--------- ---------
367,552 370,358
Less accumulated depreciation ....................... 151,454 132,545
--------- ---------
Property and equipment, net ......................... 216,098 237,813
--------- ---------
LONG-TERM INVESTMENTS .................................. 187,014 --
GOODWILL ............................................... 4,815 4,815
OTHER ASSETS ........................................... 5,676 5,748
--------- ---------
$ 538,166 $ 526,294
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities ............ $ 14,866 $ 13,073
Compensation & benefits ............................. 15,449 14,699
Income taxes payable ................................ 1,136 --
Insurance accruals .................................. 65,308 60,882
Other accruals ...................................... 7,916 6,718
--------- ---------
Total current liabilities ................. 104,675 95,372
--------- ---------
LONG-TERM LIABILITIES
Income taxes payable ................................ 34,130 37,593
Deferred income taxes ............................... 49,335 50,570
--------- ---------
Total long-term liabilities .............. 83,465 88,163
--------- ---------
COMMITMENTS AND CONTINGENCIES
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 96,158 in 2008 and 96,949 in 2007 ..... 962 970
Additional paid-in capital .......................... 439 439
Retained earnings ................................... 358,784 341,350
Accumulated other comprehensive loss ................ (10,159) --
--------- ---------
Total stockholders' equity .................... 350,026 342,759
--------- ---------
$ 538,166 $ 526,294
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
1
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
(unaudited) (unaudited)
2008 2007 2008 2007
---- ---- ---- ----
Operating revenue ........................... $ 164,592 $ 149,103 $ 313,641 $ 292,532
--------- --------- --------- ---------
Operating expenses:
Salaries, wages, and benefits ......... 48,591 50,951 97,183 98,964
Rent and purchased transportation ..... 5,144 5,643 10,250 10,865
Fuel .................................. 60,495 39,697 110,993 76,510
Operations and maintenance ............ 4,353 3,499 8,316 6,703
Operating taxes and licenses .......... 2,343 2,338 4,585 4,619
Insurance and claims .................. 7,012 5,688 10,795 11,278
Communications and utilities .......... 931 1,013 1,936 1,869
Depreciation .......................... 10,663 11,877 21,076 23,581
Other operating expenses .............. 4,139 4,439 8,471 8,564
Loss (gain) on disposal of property and 11 (4,112) (633) (9,778)
equipment
--------- --------- --------- ---------
Total operating expenses .............. 143,682 121,033 272,972 233,175
--------- --------- --------- ---------
Operating income ................ 20,910 28,070 40,669 59,357
Interest income ............................. 2,236 2,906 5,099 6,222
--------- --------- --------- ---------
Income before income taxes .................. 23,146 30,976 45,768 65,579
Federal and state income taxes .............. 5,915 11,135 13,874 23,185
--------- --------- --------- ---------
Net income .................................. $ 17,231 $ 19,841 $ 31,894 $ 42,394
========= ========= ========= =========
Earnings per share .......................... $ 0.18 $ 0.20 $ 0.33 $ 0.43
========= ========= ========= =========
Weighted average shares outstanding ......... 96,158 98,252 96,186 98,252
========= ========= ========= =========
Dividends declared per share ................ $ 0.02 $ 2.02 $ 0.04 2.04
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)
(unaudited)
Accumulated
Capital Additional Other
Stock, Paid-In Retained Comprehensive
Common Capital Earnings Loss Total
--------- ---------- --------- --------- ---------
Balance, December 31, 2007 ............ $ 970 $ 439 $ 341,350 -- $ 342,759
Comprehensive income:
Net income ....................... -- -- 31,894 -- 31,894
Unrealized loss on
available-for-sale securities,
net of tax ..................... -- -- -- (10,159) (10,159)
---------
Total comprehensive income........ 21,735
Dividends on common stock, $0.04 per
share .................................. -- -- (3,846) -- (3,846)
Stock repurchase ....................... (8) -- (10,614) -- (10,622)
--------- -------- ---------- --------- ---------
Balance, June 30, 2008 ................. $ 962 $ 439 $ 358,784 $(10,159) $ 350,026
========= ======== ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six months ended
June 30,
(Unaudited)
2008 2007
OPERATING ACTIVITIES
Net income ........................................... $ 31,894 42,394
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ..................... 21,076 23,589
Deferred income taxes ............................. (3,116) 2,046
Amortization of share based compensation .......... -- 63
Gain on disposal of property and equipment ........ (633) (9,778)
Changes in certain working capital items:
Trade receivables ............................... (8,677) (5,242)
Prepaid expenses and other current assets ....... (2,581) (2,021)
Accounts payable, accrued liabilities,
and accrued expenses .......................... 8,277 3,638
Accrued income taxes ............................ (2,270) 978
--------- ---------
Net cash provided by operating activities ........ 43,970 55,667
--------- ---------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment ......... 1,828 11,614
Purchases of property and equipment, net of trades ... (650) (21,940)
Net (purchases) sales of investments ................. (10,943) 159,375
Change in other assets ............................... 72 (200)
--------- ---------
Net cash (used in) provided by investing activities (9,693) 148,849
--------- ---------
FINANCING ACTIVITIES
Cash dividend ..................................... (3,862) (202,396)
Stock repurchase .................................. (10,622) --
--------- ---------
Net cash used in financing activities .. (14,484) (202,396)
--------- ---------
Net increase in cash and cash equivalents ............ 19,793 2,120
CASH AND CASH EQUIVALENTS
Beginning of period .................................. 7,960 8,459
--------- ---------
End of period ........................................ $ 27,753 10,579
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes, net ................................. $ 19,260 $ 20,161
Noncash investing and financing activities:
Fair value of revenue and equipment traded ......... $ 1,818 $ 6,429
Purchased property and equipment in accounts payable $ 365 $ 100
Common stock dividends declared in accounts payable $ 1,939 --
The accompanying notes are an integral part of these consolidated financial
statements.
4
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Heartland
Express, Inc. and subsidiaries (the "Company") have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all normal, recurring adjustments
considered necessary for a fair presentation have been included. The
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes for the year ended
December 31, 2007 included in the Annual Report on Form 10-K of the Company
filed with the Securities and Exchange Commission. Interim results of operations
are not necessarily indicative of the results to be expected for the full year
or any other interim periods. There were no changes to the Company's significant
accounting policies during the six month period ended June 30, 2008 other than
the adoption of Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" ("SFAS 157") as discussed in Note 5.
Note 2. Use of Estimates
The preparation of the consolidated 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 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.
Note 3. Segment Information
The Company has ten regional operating divisions 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.
Note 4. Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications did not have any effect on the
Company's financial position, operating income, net income or cash flows for the
period ended June 30, 2007. In the consolidated balance sheet as of June 30,
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 period ended June 30, 2007, the Company reclassified $1.2
million from investing activities as a component of net purchases of
investments, to operating activities as a component of changes in other current
assets.
5
Note 5. Adoption of SFAS 157
In September 2006, the Financial Accounting Standards Board ("FASB") issued
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, 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. Fair value
measurements for assets and liabilities where there exists limited or no
observable market data and, therefore, are based primarily upon our own
estimates (with input from our external services providers), are calculated
based on our assessment of current market and economic conditions. Therefore,
the results cannot be determined with precision and may not be realized in an
actual sale or immediate settlement of the asset or liability. Additionally,
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 7 for further discussion of the impact of SFAS 157 for the period ended
June 30, 2008. The adoption of SFAS 157 did not have any impact on income from
operations, net income, and related earnings per share for the three month or
six month periods ended June 30, 2008.
Note 6. Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments with original
maturities of three months or less. Restricted and designated cash and
short-term investments totaling $5.7 million at June 30, 2008 and December 31,
2007 are included in other assets. The restricted funds represent those required
by state agencies for self-insurance purposes and designated funds that are
earmarked for a specific purpose and not for general business use.
Note 7. 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. The investments typically have an interest
reset provision of 35 days with contractual maturities that range from 6 to 39
years as of June 30, 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. Primarily all
investments have AAA (or equivalent) ratings from recognized rating agencies as
of June 30, 2008. There were no gains (losses) on sales of investments in the
auction process prior to auction failures.
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 June 30, 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 June 30, 2008, the Company
6
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. This is consistent with the
presentation made in the financial statements as of March 31, 2008. To date,
there have been no instances of delinquencies or non-payment of applicable
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 in accordance with SFAS 157, "Fair Value Measurements" 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 June 30, 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 June 30, 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
June 30, 2008 was calculated using unobservable, Level 3 inputs, as defined by
SFAS 157. The fair value of these investments as of the June 30, 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 June 30, 2008
relate to the Company's investment in auction rate student loan educational
bonds.
The estimated fair value of the underlying investments as of June 30, 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 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. As a result of the fair value measurements,
the Company recognized an unrealized loss and reduction to investments, of $10.4
million during the six month period ended June 30, 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 $10.2 million net
of tax was recorded as an adjustment to other accumulated comprehensive loss.
The Company has evaluated the unrealized losses 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.
o Subsequent to June 30, 2008, the Company received $8.0 million in
calls at par, further evidencing that the underlying investments
are being settled at par.
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 has not been any significant changes in collateralization
and ratings of the underlying securities since the first failed
auction.
7
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 ARS 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.
As the Company has the intent and ability to hold these investments until
recovery, there was not any other than temporary impairment recorded on
these investments during the period ended June 30, 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 operations.
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 six month period ended June 30, 2008.
Available-for-sale
Level 3 Fair Value Measurements debt securities (1)
(in thousands)
Balance, December 31, 2007 $ -
Purchases, sales, issuances, and settlements 10,924
Transfers in to (out of) Level 3 186,427
Total gains or losses (realized/unrealized):
Included in earnings -
Included in other comprehensive loss (10,413)
----------
Balance, June 30, 2008 $ 186,938
==========
(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 six months ended
June 30, 2008, the fair value of these securities was changed to modeling
techniques, as described previously, using unobservable market inputs.
8
The amortized cost and fair value of investments at June 30, 2008 and
December 31, 2007 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
June 30, 2008: (in thousands)
Current:
Municipal bonds $ 460 - - $ 460
Long-term
Municipal bonds $ 76 - - $ 76
Auction rate student loan
educational bonds 197,351 - 10,413 186,938
--------- ---------- ------- --------
$ 197,427 - $10,413 $187,014
========= ========== ======= ========
December 31, 2007:
Current:
Municipal bonds $ 517 - - $ 517
Auction rate student loan
educational bonds 186,427 - - 186,427
--------- ---------- ------- --------
$ 186,944 - - $186,944
========= ========== ======= ========
Note 8. Property, Equipment, and Depreciation
Property and equipment are stated at cost, while maintenance and repairs
are charged to operations as incurred. 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.
Note 9. Earnings Per Share
Earnings per share are based upon the weighted average common shares
outstanding during each period. Heartland Express has no common stock
equivalents; therefore, diluted earnings per share are equal to basic earnings
per share.
Note 10. Dividends
On June 9, 2008, the Company's Board of Directors declared a regular
quarterly dividend of $0.02 per common share, approximately $1.9 million,
payable July 2, 2008 to shareholders of record at the close of business on June
20, 2008. On July 2, 2008, the Company paid the $1.9 million dividend declared
during the second quarter of 2008.
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.
Note 11. Income Taxes
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes-An
Interpretation of FASB Statement No. 109 ("FIN48"). Beginning with the adoption
of FIN 48, 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 the
period in which the change in judgment occurs. The Company records interest and
penalties related to unrecognized tax benefits in income tax expense.
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 June 30, 2008, the Company had a total of $22.4
million in gross unrecognized tax benefits. Of this amount, $14.6 million
represents the amount of unrecognized tax benefits that, if recognized, would
impact our effective tax rate. Unrecognized tax benefits were reduced by
approximately $2.2 million and $3.2 million during the three and six month
9
period ended June 30, 2008, respectively, due to the expiration of certain
statutes of limitation. There were no additional tax accruals for uncertain tax
positions recorded during the quarter ended June 30, 2008. The total amount of
accrued interest and penalties for such unrecognized tax benefits was $14.4
million at June 30, 2008 and $14.9 million at December 31, 2007. Net interest
and penalties included in income tax expense for the three and six month periods
ended June 30, 2008 was a benefit of approximately $0.4 and $0.2 million,
respectively, and was not material for the same period of 2007. These
unrecognized tax benefits relate to risks associated with state income tax
filing positions for the Company's corporate subsidiaries.
The Company's effective tax rate was 25.6% and 35.9 %, respectively, in the
three months ended June 30, 2008 and 2007. The Company's effective tax rate was
30.3% and 35.3%, respectively, in the six months ended June 30, 2008 and 2007.
The decrease in the effective tax rate is directly attributable to a favorable
income tax expense adjustment as a result of the application of FASB
Interpretation No. 48 ("FIN 48"). Under the application of FIN 48 during the
quarter ended June 30, 2008 and six months ended June 30, 2008, the Company
reduced its liability for unrecognized tax benefits and associated penalties and
interest for lapses in applicable statute of limitations. The associated tax
benefit was $2.5 million and $3.5 million for the three and six month periods
ended June 30, 2008, respectively. The associated changes for the three and six
month periods ended June 30, 2007 were not material.
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 June 30, 2008, the Company did not have any ongoing examinations or
outstanding litigation related to tax matters. At this time, management's best
estimate of the reasonably possible change in the amount of unrecognized tax
benefits to be a decrease of approximately $1.0 to $1.5 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.
Note 12. Commitments and Contingencies
The Company is party to ordinary, routine litigation and administrative
proceedings incidental to its business. In the opinion of management, the
Company's potential exposure under pending legal proceedings is adequately
provided for in the accompanying consolidated financial statements.
Note 13. Share Repurchases
In September 2001, the Board of Directors of the Company authorized a
program to repurchase 15.4 million shares, as adjusted for stock splits after
the approval, of the Company's common stock in open market or negotiated
transactions using available cash, cash equivalents, and investments. The
authorization to repurchase remains open at June 30, 2008 and has no expiration
date. The repurchase program may be suspended or discontinued at any time
without prior notice.
The Company repurchased the following shares of common stock under the
above-described repurchase plan:
Six Months Ended June 30,
------------------------
2008 2007
---------- -----------
Shares of Common Stock Repurchased (in Millions)
0.8 -
Value of stock repurchased (in Millions) $ 10.6 $ -
10
Note 14. 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 terminated in July 2007 with no penalties for early
termination. The Company currently rents storage space from its chief executive
officer on a month-to-month lease, which provides monthly rentals that are not
significant. In the opinion of management, the rates paid are comparable to
those that could be negotiated with a third party.
Rent expense paid to the Company's chief executive officer totaled
approximately $0.02 million for the three months ended June 30, 2008. There was
no rent expense paid to the chief executive officer during the three months
ended June 30, 2007. Rent expense paid to the chief executive officer totaled
approximately $0.03 million and $0.05 million for the six months ended June 30,
2008 and 2007. Rent expense is included in rent and purchased transportation per
the consolidated statements of income. There were not any amounts due and not
paid under these leases as of June 30, 2008.
Note 15. Accounting Pronouncements
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 became effective for the Company January 1, 2008. The adoption did
not effect the financial position, results of operations, and cash flows of the
Company.
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 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 will be effective 60
days following the SEC's approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. 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.
Note 16. Subsequent Event
Subsequent to June 30, 2008, the Company entered into a commitment to
acquire new revenue equipment for approximately $86.0 million, net of trade-ins
and sales, for delivery through the remainder of 2008 and throughout 2009. These
commitments are expected to be financed from existing cash, cash equivalents and
short-term investment balances and cash flows from operations.
11
During July 2008 the Company received approximately $8.0 million in cash
from auction rate securities called by issuers. The Company received par value
for the investments called.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Except for certain historical information contained herein, this Quarterly
Report on Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve risks, assumptions and uncertainties which are difficult to predict. All
statements, other than statements of historical fact, are statements that could
be deemed forward-looking statements, including any projections of earnings,
revenues, or other financial items; any statements of plans, strategies, and
objectives of management for future operations; any statements concerning
proposed new strategies or developments; any statements regarding future
economic conditions or performance; any statements of belief and any statement
of assumptions underlying any of the foregoing. Words such as "believe," "may,"
"could," "expects," "anticipates," and "likely," and variations of these words
or similar expressions, are intended to identify such forward-looking
statements. The Company's actual results could differ materially from those
discussed in the section entitled "Factors That May Affect Future Results,"
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" set forth in the Company's Annual report on Form 10-K,
which is by this reference incorporated herein. The Company does not assume, and
specifically disclaims, any obligation to update any forward-looking statements
contained in this Quarterly report.
Overview
Heartland Express, Inc. is a short-to-medium haul truckload carrier. The
Company transports freight for major shippers and generally earns revenue based
on the number of miles per load delivered. The Company provides regional dry van
truckload services from eight regional operating centers plus its corporate
headquarters. The Company's nine regional operating centers, accounted for 73.4%
and 73.2% of the second quarter 2008 and 2007 operating revenues and 73.5% and
73.1% of the operating revenues for the six month period ended June 30, 2008 and
2007. The Company takes pride in the quality of the service that it provides to
its customers. The keys to maintaining a high level of service are the
availability of late-model equipment and experienced drivers.
Operating efficiencies and cost controls are achieved through equipment
utilization, operating a fleet of late model equipment, maintaining an industry
leading driver to non-driver employee ratio, and the effective management of
fixed and variable operating costs. At June 30, 2008, the Company's tractor
fleet had an average age of 2.5 years while the trailer fleet had an average age
of 4.3 years. During July 2008, the Company finalized plans for a tractor fleet
upgrade covering approximately half of the Company's tractors. The Company is
anticipating delivery of the tractors during the remainder of 2008 and
throughout 2009. The Company has grown internally by providing quality service
to targeted customers with a high density of freight in the Company's regional
operating areas. In addition to the development of its regional operating
centers, the Company has made five acquisitions since 1987. Future growth is
dependent upon several factors including the level of economic growth and the
related customer demand, the available capacity in the trucking industry,
potential of acquisition opportunities, and the availability of experienced
drivers.
The Company ended the second quarter of 2008 with operating revenues of
$164.6 million, including fuel surcharges, net income of $17.2 million, and
earnings per share of $0.18 on average outstanding shares of 96.2 million. The
Company posted an 87.3% operating ratio (operating expenses as a percentage of
operating revenues) and a 10.5% net margin (net income as a percentage of
operating revenues). The Company ended the quarter with cash, cash equivalents,
short-term and long-term investments of $215.2 million and a debt-free balance
sheet. The Company had total assets of $538.2 million at June 30, 2008. The
Company achieved a return on assets of 12.5% and a return on equity of 19.3% for
the twelve months ended June 30, 2008, compared to the twelve months ended June
30, 2007 which were 14.9% and 21.1%, respectively. The Company's cash flow from
12
operations for the first six months of 2008 of $44.0 million represented a 21.0%
decrease from the same period of 2007 mainly due to a decrease in net income.
The Company's cash flow from operations was 14.0% of operating revenues for the
six month period ended June 30, 2008 compared to 19.0% for the same period in
2007.
The overall decline in the demand for freight services, an overcapacity of
trucks and historical highs in fuel pricing continued to negatively impact the
operating results for the three and six month periods ended June 30, 2008
although the Company did experience an increase in demand for freight late in
the second quarter of 2008. The soft freight demand continued to result in
downward pressures on freight and fuel surcharge rates and has resulted in lower
equipment utilization for the three and six month periods ended June 30, 2008.
Fuel expense, net of fuel surcharge recoveries, increased 20.4% during the three
month period ended June 30, 2008 compared to the 2007 three month period and
21.7% during the six month period ended June 30, 2008 compared to the same
period of 2007.
Results of Operations:
The following table sets forth the percentage relationship of expense items
to operating revenue for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
------ ------ ------ ------
Operating revenue .......................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses:
Salaries, wages, and benefits ............ 29.5% 34.2% 31.0% 33.8%
Rent and purchased transportation ........ 3.1 3.8 3.3 3.7
Fuel ..................................... 36.8 26.6 35.4 26.2
Operations and maintenance ............... 2.6 2.3 2.7 2.3
Operating taxes and licenses ............. 1.4 1.6 1.5 1.6
Insurance and claims ..................... 4.3 3.8 3.4 3.9
Communications and utilities ............. 0.6 0.7 0.6 0.6
Depreciation ............................. 6.5 8.0 6.7 8.1
Other operating expenses ................. 2.5 3.0 2.7 2.9
Gain on disposal of property and equipment -- (2.8) (0.2) (3.3)
----- ----- ----- -----
Total operating expenses ................. 87.3% 81.2% 87.0% 79.7%
----- ----- ----- -----
Operating income ..... 12.7% 18.8% 13.0% 20.3%
Interest income ............................. 1.4 1.9 1.6 2.1
----- ----- ----- -----
Income before income taxes ....... 14.1% 20.8% 14.6% 22.4%
Federal and state income taxes .............. 3.6 7.5 4.4 7.9
----- ----- ----- -----
Net income ....................... 10.5% 13.3% 10.2% 14.5%
===== ===== ===== =====
The following is a discussion of the results of operations of the three and
six month period ended June 30, 2008 compared with the same period in 2007.
Three Months Ended June 2008 and 2007
Operating revenue increased $15.5 million (10.4%), to $164.6 million in the
second quarter of 2008 from $149.1 million in the second quarter of 2007. The
increase in revenue resulted from an increase in fuel surcharge revenue of $17.3
million to $38.4 million, offset by a decrease in line haul revenue of
approximately $1.8 million. The increase in fuel surcharge revenue was a direct
result of an increase in fuel costs during the period. Fuel surcharge revenue
was $21.1 million in the second quarter of 2007. The decrease in line haul
revenue was due to a reduction in fleet miles, $3.3 million, as a direct result
13
of an overall decline in market demand for freight offset by line haul revenues
as a result of rate improvements, of approximately $1.5 million.
Salaries, wages, and benefits decreased $2.4 million (4.6%), to $48.6
million in the second quarter of 2008 from $51.0 million in the second quarter
of 2007. The decrease in salaries, wages and benefits was the net result of
decreases of approximately $0.7 million in company driver wages, approximately
$0.2 million in health insurance and approximately $1.6 million in workers'
compensation offset by an increase of $0.1 million in non-driver payroll. Driver
wages decreased $0.7 million (2.0%), due to a decrease in total fleet miles as a
direct result of an overall decline in market demand for freight. The mix of the
number of employee drivers to independent contractors increased slightly to a
mix of 96% company drivers and 4% independent contractors during the quarter
ended June 30, 2008 compared to 95% company drivers and 5% independent
contractors during the same period of 2007. The decrease in workers'
compensation expense , $1.6 million (68.4%) to $0.7 million in the quarter ended
June 30, 2008 from $2.3 million in for the same period in 2007 due to a decrease
in frequency and severity of claims. Health insurance expense decreased $0.2
million (10.0%) to $2.3 million in the second quarter of 2008 from $2.5 million
in second quarter of 2007 due to a decrease in frequency and severity of claims.
Rent and purchased transportation decreased $0.5 million (8.8%), to $5.1
million in the second quarter of 2008 from $5.6 million in the second quarter of
2007. Rent and purchased transportation for both periods includes amounts paid
to independent contractors under the Company's fuel stability program. The
decrease reflects the net effect of the Company's decreased number of
independent contractors as well as an overall decrease in miles driven by
independent contractors ($1.0 million) and an increase of amounts paid under the
Company's fuel stability program ($0.5 million).
Fuel increased $20.8 million (52.4%), to $60.5 million for the three months
ended June 30, 2008 from $39.7 million for the same period of 2007. The increase
is the net result of increased fuel prices, a slight decrease in miles driven,
and a decrease in fuel economy associated with the EPA-mandated clean air
engines requirements on tractor models acquired during 2006. The Company's fuel
cost per mile per company-owned tractor mile increased 54.5% in second quarter
of 2008 compared to 2007. Fuel cost per mile, net of fuel surcharge, increased
22.1% in the second quarter of 2008 compared to 2007. The Company's second
quarter fuel cost per gallon, $4.21 per gallon, increased by 60.8% in 2008
compared to the same period of 2007, $2.62 per gallon, which was offset by a
slight increase in fuel economy based on fuel cost reduction initiatives.
Operations and maintenance increased $0.9 million (24.4%), to $4.4 million
in the second quarter of 2008 from $3.5 million in the second quarter of 2007
due to an increase in preventative maintenance, maintenance and parts
replacement directly related to an increase in average age of our tractor fleet.
Insurance and claims increased $1.3 million (23.3%), to $7.0 million in the
second quarter of 2008 from $5.7 million in the second quarter of 2007 due to an
increase in the severity of larger claims.
Depreciation decreased $1.2 million (10.2%), to $10.7 million during the
second quarter of 2008 from $11.9 million in the second quarter of 2007. The
decrease is mainly attributable to a decrease in tractor purchases for the
twelve month periods leading up to and including the quarters ended June 30,
2008 and 2007. As tractors are depreciated using the 125% declining balance
methods, depreciation expense declines in years subsequent to the first year
after initial purchase. Tractor depreciation decreased $1.6 million to $7.3
million in the quarter ended June 30, 2008 from $8.9 million in the quarter
ended June 30, 2007. The decline in tractor depreciation was offset by an
increase of $0.1 million in trailer depreciation and $0.3 million on all other
assets for the three months ended June 30, 2008 compared to the same period of
2007. The increase in trailer depreciation was the direct result of an increase
in the average number of trailers from period to period. The increase in assets
other than revenue equipment was due to additional building and land improvement
depreciation associated with new facilities in North Liberty, Iowa and Phoenix,
Arizona opened during 2nd and 3rd quarters of 2007.
14
Other operating expenses decreased $0.3 million (6.8%), to $4.1 million in
the second quarter of 2008 from $4.4 million in the second quarter of 2007.
Other operating expenses consists of costs incurred for advertising expense,
freight handling, highway tolls, driver recruiting expenses, and administrative
costs.
Loss (gain) on the disposal of property and equipment decreased $4.1
million (100%), to a loss of $0.01 million during the second quarter of 2008
from a gain of $4.1 million in the second quarter of 2007. Approximately $2.2
million of the decline is attributable to a substantial decrease in the number
of tractors traded or sold during the 2008 period compared to the 2007 period.
Additionally, there was approximately $1.9 million in gains during the second
quarter of 2007 as the Company sold real estate held in Dubois, Pennsylvania
that was being leased to an unrelated third party. There was not any property
sales during the quarter ended June 30, 2008.
Interest income decreased $0.7 million (23.1%) in the second quarter of
2008 compared to the 2007 period as a result of a 17.1% decrease in average
cash, cash equivalents, and investments held during each period. The decrease in
average cash, cash equivalents, and investments is primarily due to the payment
of a special dividend in May 2007 of approximately $196.5 million which was
primarily funded with the sale of investments.
The Company's effective tax rate was 25.6% and 35.9%, respectively, in the
second quarter of 2008 and 2007. The decrease in the effective tax rate was
largely attributable to a favorable income tax expense adjustment as a result of
the application of FIN 48. Under the application of FIN 48, the Company reduced
its liability for unrecognized tax benefits related to risks associated with
state income tax filing positions for the Company's corporate subsidiaries.
As a result of the foregoing, the Company's operating ratio (operating
expenses as a percentage of operating revenue) was 87.3% during the second
quarter of 2008 compared with 81.2% during the second quarter of 2007. Net
income decreased $2.6 million (13.2%), to $17.2 million during the second
quarter of 2008 from $19.8 million during the second quarter of 2007.
Six Months Ended June 2008 and 2007
Operating revenue increased $21.1 million (7.2%), to $313.6 million in the
six months ending June 30, 2008 from $292.5 million in the 2007 period. The
increase in revenue resulted from an increase in fuel surcharge revenue of $27.0
million to $66.2 million, offset by a decrease in line haul revenue of
approximately $5.9 million. The increase in fuel surcharge revenue was a direct
result of an increase in fuel costs during the period. Fuel surcharge revenue
was $39.2 million for the six months ended June 30, 2007. The decrease in line
haul revenue was due to a reduction in fleet miles, $7.5 million, as a direct
result of an overall decline in market demand for freight that the Company
experienced during the first half of 2008 compared to 2007. The decrease in line
haul revenue due to reduction of fleet miles was offset approximately $1.6
million due to average line haul rate improvements for the six months ending
June 30, 2008 compared to the same period of 2007.
Salaries, wages, and benefits decreased $1.8 million (1.8%), to $97.2
million in the six months ended June 30, 2008 from $99.0 million in the 2007
period. The decrease in salaries, wages and benefits was the net result of
decreases of approximately $1.8 million in company driver wages, approximately
$0.3 million in workers' compensation and approximately $0.2 in other benefits
offset by an increase of $0.5 million in non-driver payroll. Driver wages
decreased $1.8 million (2.4%), due to a decrease in total fleet miles as a
direct result of an overall softness in market demand for freight during the
first half of 2008 compared to the same period of 2007. The mix of the number of
employee drivers to independent contractors increased slightly to a mix of 96%
company drivers and 4% independent contractors during the six months ended June
30, 2008 compared to 95% company drivers and 5% independent contractors during
the same period of 2007. The decrease in workers' compensation expense, $0.3
million (8.3%) to $2.9 million in the six month period ended June 30, 2008 from
$3.1 million in for the same period in 2007 due to a decrease in frequency and
severity of claims. The increase in non-driver payroll was mostly due to
increased employee levels.
15
Rent and purchased transportation decreased $0.6 million (5.7%), to $10.3
million in the first six months of 2008 from $10.9 million in the compared
period of 2007. Rent and purchased transportation for both periods includes
amounts paid to independent contractors under the Company's fuel stability
program. The decrease reflects the net effect of the Company's decreased number
of independent contractors as well as an overall decrease in miles driven by
independent contractors ($1.5 million) and an increase of amounts paid under the
Company's fuel stability program ($0.9 million).
Fuel increased $34.5 million (45.1%), to $111.0 million for the six months
ended June 30, 2008 from $76.5 million for the same period of 2007. The increase
is the net result of increased fuel prices ($36.1 million) and a decrease in
miles driven ($1.6 million). The Company's fuel cost per company-owned tractor
mile increased 48.2% in first six months of 2008 compared to the same period of
2007. Fuel cost per mile, net of fuel surcharge, increased 24.0% in the first
six months of 2008 compared to the same period of 2007. The Company's fuel cost
per gallon for the first six months of 2008, $3.80 per gallon, increased by
51.9% in 2008 compared to the same period of 2007, $2.50 per gallon.
Operations and maintenance increased $1.6 million (24.1%), to $8.3 million
in the six months ended June 30, 2008 from $6.7 million for the compared 2007
due to an increase in preventative maintenance, maintenance and parts
replacement directly related to an increase in average age of our tractor fleet
as well as more adverse weather conditions during the first three months of 2008
compared to the same period of 2007.
Insurance and claims decreased $0.5 million (4.3%), to $10.8 million in the
six months ended June 30, 2008 from $11.3 million in the same period of 2007 due
to decreases in the frequency and severity of claims.
Depreciation decreased $2.5 million (10.6%), to $21.1 million for the six
month period ended June 30, 2008 from $23.6 million in the same period of 2007.
The decrease is mainly attributable to a decrease in tractor purchases for the
twelve month periods leading up to and including the first six months of 2008
and 2007. As tractors are depreciated using the 125% declining balance methods,
depreciation expense declines in years subsequent to the first year after
initial purchase. Tractor depreciation decreased $3.5 million to $14.2 million
in the six month period ended June 30, 2008 from $17.7 million in the quarter
ended June 30, 2007 on approximately a 1% decrease in the amount of tractors
operated. The decline in tractor depreciation was offset by an increase of $0.4
million in trailer depreciation and $0.6 million on all other assets for the six
month period ended June 30, 2008 compared to the same period of 2007. The
increase in trailer depreciation was the direct result of an increase in the
average number of trailers from period to period of approximately 6%. The
increase in other asset depreciation is due to new facilities in North Liberty,
Iowa and Phoenix, Arizona opened during 2nd and 3rd quarters of 2007.
Other operating expenses decreased $0.1 million (1.1%), to $8.5 million
during the six months ended June 30, 2008 from $8.6 million in 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 $9.2 million
(93.5%), to $0.6 million during the six months ended June 30, 2008 from $9.8
million in the same period of 2007. Approximately $2.3 million of the decline is
attributable to a substantial decrease in the number of tractors and trailers
traded or sold during the 2008 period compared to the 2007 period. Additionally,
there was approximately $6.8 million in gains during the six month period ended
June 30, 2007 attributable to sales of real estate held in Dubois, Pennsylvania
that was being leased to an unrelated third party as well as an idle facility in
Columbus, Ohio and property in Coralville, Iowa. The proceeds received from
those sales was used in the financing the new corporate headquarters in North
Liberty, Iowa. There was not any property sales during the six month period
ended June 30, 2008.
16
Interest income decreased $1.1 million (18.0%), to $5.1 million in the six
months ended June 30, 2008 from $6.2 million in the same period of 2007 as a
result of a 33.9% decrease in average cash, cash equivalents, and investments
held during each period. The decrease in average cash, cash equivalents, and
investments is primarily due to the payment of a special dividend in May 2007 of
approximately $196.5 million which was primarily funded with the sale of
investments.
The Company's effective tax rate was 30.3% and 35.4%, respectively, in the
six months ended June 30, 2008 and 2007. The decrease in the effective tax rate
was largely attributable to a favorable income tax expense adjustment as a
result of the application of FIN 48. Under the application of FIN 48, the
Company reduced its liability in the six months ended June 30, 2008, for
unrecognized tax benefits related to risks associated with state income tax
filing positions for the Company's corporate subsidiaries.
As a result of the foregoing, the Company's operating ratio (operating
expenses as a percentage of operating revenue) was 87.0% during the first six
months of 2008 compared with 79.7% during the first six months of 2007. Net
income decreased $10.5 million (24.8%), to $31.9 million during the first six
months of 2008 from $42.4 million during the compared 2007 period.
Liquidity and Capital Resources
The growth of the Company's business requires significant investments in
new revenue equipment. Historically the Company has been debt-free, funding
revenue equipment purchases with cash flow provided by operations. The Company
also obtains tractor capacity by utilizing independent contractors, who provide
a tractor and bear all associated operating and financing expenses. The
Company's primary source of liquidity for the six months ended June 30, 2008,
was net cash provided by operating activities of $44.0 million compared to $55.7
million in 2007. This decrease of $11.7 million is due primarily to net income
(excluding non-cash depreciation, deferred tax and amortization of unearned
compensation, and gains on disposal of equipment) being approximately $9.1
million lower in the six month period ended June 30, 2008 compared to the same
period of 2007 in addition to an increase in operating cash outflows due to
working capital items increasing approximately $2.6 million. The net increase in
cash outflows by operating assets and liabilities was primarily the result of
changes in accounts receivable, accounts payable and insurance accruals as well
as timing of tax payments from period to period. Cash flow from operating
activities was 14.0 % of operating revenues in 2008 compared with 19.0% in 2007.
Capital expenditures for property and equipment, net of trade-ins, totaled
$0.7 million for the first six months of 2008 compared to $21.9 million during
the same period of 2007. Capital expenditures during the first six months of
2007 included $3.8 million for construction of buildings related to our Phoenix
and North Liberty facilities. Construction of these facilities was completed
during the second and third quarters of 2007. Capital expenditures for the first
six months of 2007 also included $10.4 million of tractors and $7.7 million of
trailers. There were $0.4 million in tractor purchases and no capital
expenditures for construction costs during the first six months of 2008.
The Company paid cash dividends of $3.9 million in the six month period
ended June 30, 2008 compared to $202.4 million in 2007. The Company declared a
$1.9 million cash dividend in June 2008, included in accounts payable and
accrued liabilities at June 30, 2008, which was paid on July 2, 2008. Dividends
paid during the six month period ended June 30, 2007 included a special dividend
of $2.00 per share, $196.5 million, and regular quarterly dividend of $2.0
million for the second quarter of 2007.
The Company paid income taxes of $19.3 million, net of refunds, in 2008
which was $0.9 million lower than income taxes paid during the same period in
2007 of $20.2 million.
In September, 2001, the Board of Directors of the Company authorized a
program to repurchase 15.4 million shares, adjusted for stock splits, of the
Company's Common Stock in open market or negotiated transactions using available
cash and cash equivalents. The authorization to repurchase remains open at June
30, 2008 and has no expiration date. During the six months ended June 30, 2008,
17
approximately 0.8 million shares of the Company's common stock were repurchased
for approximately $10.6 million at approximately $13.40 per share. The
repurchased shares were subsequently retired. There were no share repurchases
during the same period of 2007. At June 30, 2008, the Company has approximately
11.5 million shares remaining under the current Board of Director repurchase
authorization. Future purchases are dependent upon market conditions.
Management believes the Company has adequate liquidity to meet its current
and projected needs. Management believes the Company will continue to have
significant capital requirements over the short and long-term which are expected
to be funded from cash flows provided by operations and from existing cash and
cash equivalents. The Company ended the quarter with $27.8 million in cash and
cash equivalents, an increase of $19.8 million from December 31, 2007.
Subsequent to auction failures of auction rate student loan securities that
began in mid-February 2008, the Company has been increasing its cash and cash
equivalents with excess cash flows from operations. This redirection of excess
net cash flows accounted for the net increase in cash and cash equivalents
during the six month period ended June 30, 2008. In addition to cash and cash
equivalents, the Company had $0.5 million in short-term investments and $187.0
million in long-term investments. The Company's balance sheet remains debt free.
As of June 30, 2008, approximately 97% of the Company's $187.0 million
long-term investment balance was invested in auction rate student loan
educational bonds backed by the U.S. government. The majority, (approximately
96.5% of student loan auction rate securities portfolio at cost) of the
underlying investments continue to hold AAA (or equivalent) ratings from
recognized rating agencies. The remaining 3.5% of the student loan auction rate
securities portfolio hold AA ratings. 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 occurring at least every 35 days of the initial purchase. Due to the
current lack of liquidity in these markets, the Company's current options are to
hold the investments 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. The Company is confident it would be able
to secure financing, without selling investments at a discount, based on the
Company's current debt free balance sheet and strong operating results should
the need arise.
The Company was required to estimate the fair value of the auction rate
securities in accordance with 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 June 30, 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 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 June 30,
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 June 30, 2008 was calculated using unobservable,
Level 3 inputs, as defined by SFAS 157. The fair value of these investments as
of the June 30, 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
June 30, 2008 relates to the Company's investment in auction rate student loan
educational bonds.
The estimated fair value of the underlying investments as of June 30, 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
18
financial advisors, fair values of the student loan auction rate securities were
estimated using a discounted cash flows 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 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. As a result of the fair value measurements,
the Company recognized an unrealized loss and reduction to investments, of $10.4
million. 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 $10.2 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 operations for the six months
ended June 30, 2008.
The Company has evaluated the unrealized losses 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.
o The Company received par value for the amount of the call. Subsequent
to June 30, 2008, the Company received $8.0 million in calls at par,
further evidencing that the underlying investments are being settled
at par.
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 has not been any significant changes in collateralization and
ratings of the underlying securities since the first failed auction.
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
ARS 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.
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.
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 operations.
Net working capital for the six month period June 30, 2008 decreased by
$162.7 million over 2007 largely due to a decrease in short-term investments of
$186.5 million as a result of the reclassification of $186.9 million of
short-term investments to long-term during the six month period ended June 30,
2008, as discussed above.
Off-Balance Sheet Transactions
The Company's liquidity is not materially affected by off-balance sheet
transactions.
19
Risk Factors
You should refer to Item 1A of our annual report (Form 10-K) for the year
ended December 31, 2007, under the caption "Risk Factors" for specific details
on the following factors that are not within the control of the Company and
could affect our financial results.
o Our business is subject to general economic and business factors that
are largely out of our control.
o Our growth may not continue at historic rates.
o Increased prices, reduced productivity, and restricted availability of
new revenue equipment may adversely affect our earnings and cash
flows.
o If fuel prices increase significantly, our results of operations could
be adversely affected.
o Difficulty in driver and independent contractor recruitment and
retention may have a materially adverse effect on our business.
o We operate in a highly regulated industry, and increased costs of
compliance with, or liability for violation of, existing regulations
could have a materially adverse effect on our business.
o Our operations are subject to various environmental laws and
regulations, the violations of which could result in substantial fines
or penalties.
o 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.
o 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.
o Should estimated fair value of auction rate securities 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 operations which could have a materially adverse effect
on our earnings.
o 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.
o Seasonality and the impact of weather may affect our operations
profitability.
o Ongoing insurance and claims expenses could significantly reduce our
earnings.
o We are dependent on computer and communications systems, and a systems
failure could cause a significant disruption to our business.
o We operate in a highly regulated industry and changes in regulation
could have a material adverse effect on our business.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Assuming we maintain our short-term and long-term investment balance
consistent with balances as of June 30, 2008, ($197.4 million amortized cost),
and if market rates of interest on our investments decreased by 100 basis
points, the estimated reduction in annual interest income would be approximately
$2.0 million.
The Company has no debt outstanding as of June 30, 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 quarter ended June 30, 2008 and
2007, fuel expense, net of fuel surcharge, was $23.7 million and $19.7 million
or 22.2% and 19.5%, respectively, of the Company's total operating expenses, net
of fuel surcharge. For the six months ended June 30, 2008 and 2007, fuel
expense, net of fuel surcharge, was $47.8 million and $39.3 million or 22.8% and
20
20.0%, respectively, of the Company's total operating expenses, net of fuel
surcharge. A significant increase in fuel costs, or a shortage of diesel fuel,
could materially and adversely affect our results of operations. In February
2007, the Board of Directors authorized the Company to begin hedging activities
related to commodity fuels to reduce its exposure to diesel fuel price
fluctuations. In the event of hedging activities, the Company will implement the
provisions of SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" and contract with an unrelated third party to transact the hedge. It
is expected any such transactions will be accounted for on a mark-to-market
basis with changes reflected in the statement of income as a component of fuel
costs. As of June 30, 2008, the Company has no derivative financial instruments
and has not utilized such instruments.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operations of the Company's
disclosure controls and procedures, and as defined in Exchange Act Rule
15d-15(e). Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in enabling the Company to record, process, summarize
and report information required to be included in the Company's periodic SEC
filings within the required time period. There have been no changes in the
Company's internal controls over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to ordinary, routine litigation and
administrative proceedings incidental to its business. These
proceedings primarily involve claims for personal injury, property
damage, and workers' compensation incurred in connection with the
transportation of freight. The Company maintains insurance to cover
liabilities arising from the transportation of freight for amounts in
excess of certain self-insured retentions.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on May 8, 2008.
At the Annual Meeting, the shareholders elected Russell A. Gerdin,
Michael J. Gerdin, Richard O. Jacobson, Dr. Benjamin J. Allen,
Lawrence D. Crouse, and James G. Pratt to serve as directors for a one
year term (93,329,415 for, 0 against, 61,161 withheld,) and ratified
the appointment of KPMG, LLP as the Company's independent registered
public accounting firm for the fiscal year ending December 31, 2008
(93,328,821 for, 58,213 against, 3,541 withheld). Shareholders
representing 93,390,576 shares, or approximately 97% of the Company's
outstanding Common Stock as of the record date, were present in person
or by proxy at the Annual Meeting.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended.
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Report on Form 8-K, dated April 22, 2008, announcing the
Company's financial results for the quarter ended March 31,
2008.
2. Report on Form 8-K, dated June 9, 2008, announcing the
declaration of a quarterly cash dividend.
No other information is required to be filed under Part II of the form.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND EXPRESS, INC.
Date: August 8, 2008 BY: /S/ John P Cosaert
------------------
John P. Cosaert
Executive Vice President-Finance,
Chief Financial Officer and Treasurer
(Principal accounting and financial
officer)
23
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 quarterly report on Form 10-Q of Heartland
Express, Inc. (the "Registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rule
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or cause
such disclosure controls and procedures to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's independent registered public
accounting firm and the audit committee of 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: August 8, 2008 By: /s/ Russell A. Gerdin
---------------------------
Russell A. Gerdin
Chairman and Chief Executive Officer
24
Exhibit No. 31.2
Certification
I, John P. Cosaert, Executive Vice President, Chief Financial Officer and
Treasurer of Heartland Express, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Heartland
Express, Inc. (the "Registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rule
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) Designed such internal control over financial reporting, or cause
such disclosure controls and procedures to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's independent registered public
accounting firm and the audit committee of 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: August 8, 2008 By: /s/ John P. Cosaert
-----------------------
John P. Cosaert
Executive Vice President-Finance
Chief Financial Officer and
Treasurer
(principal accounting and financial officer)
25
Exhibit No. 32
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Russell A. Gerdin, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Quarterly Report of Heartland Express, Inc., on Form 10-Q for the period ended
June 30, 2008 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, and that information contained
in such Quarterly Report on Form 10-Q fairly presents in all material respects
the financial condition and results of operations of Heartland Express, Inc.
Dated: August 8, 2008 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 the Quarterly
Report of Heartland Express, Inc., on Form 10-Q for the period ended June 30,
2008 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and that information contained in
such Quarterly Report on Form 10-Q fairly presents in all material respects
the financial condition and results of operations of Heartland Express, Inc.
Dated: August 8, 2008 By: /s/ John P. Cosaert
---------------------
John P. Cosaert
Executive Vice President
and Chief Financial Officer