ITEM 1. BUSINESS
General
Heartland Express, Inc. ("Heartland" or the "Company") is a short-to-medium haul truckload carrier based near Iowa City, Iowa. The Company provides nationwide transportation service to major shippers, using late-model equipment and a balanced fleet of company-owned and owner-operator tractors. The Company's primary traffic lanes are between customer locations east of the Rocky Mountains, with selected service to the West. Management believes that the Company's service standards and equipment accessibility have made it a core carrier to many of its major customers.
Heartland was founded by Russell A. Gerdin in 1978 and became publicly traded in November 1986. Over the thirteen years from 1986 to 1999, Heartland has grown to $261.0 million in revenue from $21.6 million and net income has increased to $33.1 million from $3.0 million. Much of this growth has been attributable to expanding service for existing customers, acquiring new customers, and continued expansion of the Company's operating regions.
In addition to internal growth, Heartland has completed four acquisitions since 1987. These acquisitions have enabled Heartland to solidify its position within historical regions, expand its customer base in the East and Northeast United States, and to pursue new customer relationships in new markets. Most recently, in July 1997, Heartland increased its Eastern operations by acquiring A & M Express, Inc. located in Kingsport, Tennessee.
A & M Express, Inc. is predominately a dry-van carrier that operates a primarily company-owned fleet. A & M reported gross revenues of approximately $28 million in 1996. A & M Express generates a small portion of its revenues from the flat bed market. The Company is operating A & M Express as a separate subsidiary. However, administrative functions are being performed at Heartland's corporate headquarters. The purchase of A & M was funded by cash and investments.
Heartland Express, Inc. is a holding company incorporated in Nevada, which owns, directly or indirectly, all of the stock of Heartland Express Inc. of Iowa, Heartland Equipment, Inc., Munson Transportation, Inc., Munson Transport Service, Inc., Munson Equipment, Inc., and A & M Express, Inc.
Operations
Heartland's operations department focuses on the successful execution of customer expectations and providing consistent opportunity for the fleet of employee drivers and independent contractors, while maximizing equipment utilization. These objectives require a combined effort of marketing, customer service, transportation planning, and fleet management.
The Company's customer service employees are 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, and trailer asset management.
Transportation planning employees are responsible for daily tactical decisions pertaining to matching the Company's freight with the appropriate capacity within geographical service areas. They assign orders to drivers based on well-defined criteria, such as driver safety and DOT compliance, customer needs and service requirements, equipment utilization, driver time at home, operational efficiency, and equipment maintenance needs.
Fleet management employees are charged with the management and development of their fleets of drivers. Additionally, they maximize the capacity that is available to the organization to meet the service needs of the Company's customers. Their responsibilities include meeting the needs of the drivers within the standards that have been set by the organization and communicating the requirements of the customers to the drivers on each order to ensure successful execution.
Serving the short-to-medium haul market (608-mile average length of haul in 1999) permits the Company to use primarily single, rather than team drivers and dispatch most trailers directly from origin to destination without an intermediate equipment change other than for driver scheduling purposes.
Heartland also operates four specialized regional distribution operations for major customers near Atlanta, Georgia; Carlisle, Pennsylvania; Columbus, Ohio; and Jacksonville, Florida. 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. These operations are handled by dispatchers at the regional locations, and the Company uses a centralized computer network and regular communication to achieve system-wide load coordination.
The Company emphasizes customer satisfaction through on-time performance, dependable late-model equipment, and consistent equipment availability to serve large customers' volume requirements. The Company also maintains a high trailer to tractor ratio, which facilitates the stationing of trailers at customer locations for convenient loading and unloading. This minimizes waiting time, which increases tractor utilization and assists with driver retention.
Customers and Marketing
The Company targets customers in its operating area that require multiple, time-sensitive shipments, including those employing "just-in-time" manufacturing and inventory management. In seeking these customers, Heartland has positioned itself as a provider of premium service at compensatory rates, rather than competing solely on the basis of price. Freight transported for the most part is non-perishable and predominantly does not require driver handling. Heartland's reputation for quality service, reliable equipment, and equipment availability makes it a core carrier to many of its customers.
Heartland seeks to transport freight that will complement traffic in its existing service areas and remain consistent with the Company's focus on short-to-medium haul and regional distribution markets. Management believes that building additional service in the Company's primary traffic lanes will assist in controlling empty miles and enhancing driver "home time."
The Company's 25, 10, and 5 largest customers accounted for 65%, 48%, and 34% of revenue, respectively, in 1999. The Company's primary customers include retailers, manufacturers, and third party logistics providers. The distribution of customers is not significantly different from the previous year. Sears Logistics Services accounted for 14% of revenue in 1999. No other customer accounted for as much as ten percent of revenue.
Drivers, Independent Contractors, and Other Personnel
Heartland's workforce is an essential ingredient in achieving its business objectives. As of December 31, 1999, Heartland employed 1,410 persons. The Company also contracted with independent contractors to provide and operate tractors. Independent contractors own their own tractors and are responsible for all associated expenses, including financing costs, fuel, maintenance, insurance, and taxes. The Company historically has operated a balanced fleet of company and independent contractor tractors. Management believes that a balanced fleet compliments the Company's recruiting efforts and offers greater flexibility in responding to fluctuations in shipper demand.
Management's strategy for both employee and independent contractor drivers is to (1) hire the best; (2) promote retention through financial incentives, positive working conditions, and targeting freight that requires little or no handling; and (3) minimize safety problems through careful screening, mandatory drug testing, continuous training, and financial rewards for accident-free driving. Heartland also seeks to minimize turnover of its employee drivers by providing modern, comfortable equipment and of all drivers by regularly scheduling them to their homes. All drivers are compensated for empty miles as well as loaded miles. This provides an incentive for the Company to minimize empty miles and at the same time does not penalize drivers for inefficiencies of operations that are beyond their control.
Heartland is not a party to a collective bargaining agreement. Management believes that the Company has good relationships with its employees and independent contractors.
Revenue Equipment
Heartland's management believes that operating high-quality, efficient equipment is an important part of providing excellent service to customers. The Company's policy is to operate its tractors while under warranty to minimize repair and maintenance cost and reduce service interruptions caused by breakdowns. In addition, the Company's preventive maintenance program is designed to minimize equipment downtime, facilitate customer service, and enhance trade value when equipment is replaced. Factors considered when purchasing new equipment include fuel economy, price, technology, warranty terms, manufacturer support, driver comfort, and resale value.
Competition
The truckload industry is highly competitive and includes thousands of carriers, none of which dominates the market. The Company competes primarily with other truckload carriers, and to a lesser extent with railroads, intermodal service, less-than-truckload carriers, and private fleets operated by existing and potential customers. Although intermodal and rail service has improved in recent years, such service has not been a major factor in the Company's short-to-medium haul traffic lanes (608-mile average length of haul). Historically, competition has created downward pressure on the truckload industry's pricing structure. Management believes that competition for the freight targeted by the Company is based primarily upon service and efficiency and to a lesser degree upon freight rates. Regulation
The Company is a common and contract motor carrier of general commodities. Historically, the Interstate Commerce Commission (the "ICC") and various state agencies regulated motor carriers' operating rights, accounting systems, mergers and acquisitions, periodic financial reporting, and other matters. In 1995 federal legislation preempted state regulation of prices, routes, and services of motor carriers and eliminated the ICC. Several ICC functions were transferred to the Department of Transportation (the "DOT"). Management does not believe that regulation by the DOT or by the states in their remaining areas of authority will have a material effect on the Company's operations. The Company's employee and independent contractor drivers also must comply with the safety and fitness regulations promulgated by the DOT, including those relating to drug and alcohol testing and hours of service.
The Company's operations are subject to various federal, state, and local environmental laws and regulations, implemented principally by the EPA and similar state regulatory agencies, governing the management of hazardous wastes, other discharge of pollutants into the air and surface and underground waters, and the disposal of certain substances. Management believes that its operations are in material compliance with current laws and regulations and does not know of any existing condition that would cause compliance with applicable environmental regulations to have a material effect on the Company's capital expenditures, earnings and competitive position. In the event the Company should fail to comply with applicable regulations, the Company could be subject to substantial fines or penalties and to civil or criminal liability.
ITEM 2.
ITEM 2. PROPERTIES
Heartland's headquarters is located adjacent to Interstate 80, near Iowa City, Iowa. The facilities include five acres of land, two office buildings of approximately 25,000 square feet combined and a storage building, all leased from the Company's president and principal stockholder. Company-owned facilities at this location include three tractor and trailer maintenance garages totaling approximately 26,500 square feet, and a safety and service complex adjacent to Heartland's corporate offices. The adjacent facility provides the Company with six acres of additional trailer parking space, a drive-through inspection bay, an automatic truck wash facility, and 6,000 square feet of office space and driver facilities. The Company also owns a motel located adjacent to its corporate offices, which functions as a motel and driver training center.
The Company owns regional facilities in Ft. Smith, Arkansas; O'Fallon, Missouri; Atlanta, Georgia; Columbus, Ohio; Jacksonville, Florida; and Kingsport, Tennessee. The Company is leasing facilities in Carlisle, Pennsylvania; Decatur, Illinois; and Rochester, New York. A facility in Dubois, Pennsylvania is being leased to an unrelated third party. The Company sold closed facilities in Woodville, Ohio and Monmouth, Illinois and a rental property in Jacksonville, Florida during 1999 to unrelated third parties. Closed facilities in Monmouth, Illinois and Forest Park, Georgia were sold subsequent to year-end to unrelated third parties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its business, primarily involving claims for personal injury and property damage incurred in the transportation of freight. The Company believes that adverse results in these cases, whether individual or in the aggregate, would not have a material effect upon the Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
During the fourth quarter of 1999, no matters were submitted to a vote of securities holders. PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Price Range of Common Stock
The Company's common stock has been traded on the NASDAQ National Market under the symbol HTLD, since November 5, 1986, the date of the Company's initial public offering. The following table sets forth for the calendar period indicated the range of high and low price quotations for the Company's common stock as reported by NASDAQ from January 1, 1998 to December 31,1999.
Period High Low Calendar Year 1999 1st Quarter $17.75 $13.00 2nd Quarter 16.63 13.00 3rd Quarter 17.88 13.38 4th Quarter 16.63 12.38
Calendar Year 1998 1st Quarter $29.00 $22.75 2nd Quarter 29.00 19.75 3rd Quarter 20.25 15.50 4th Quarter 20.25 12.38
The prices reported reflect interdealer quotations without retail mark-ups, mark-downs or commissions, and may not represent actual transactions. As of March 15, 2000 the Company had 240 stockholders of record of its common stock. However, the Company estimates that it has a significantly greater number of stockholders because a substantial number of the Company's shares are held of record by brokers or dealers for their customers in street names.
Dividend Policy
The Company has never declared and paid a cash dividend. It is the current intention of the Company's Board of Directors to retain earnings to finance the growth of the Company's business. 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below reflect the consolidated financial position and results of operations of Heartland Express, Inc., and its subsidiaries. The selected consolidated financial data are derived from the Company's consolidated financial statements. This data 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 elsewhere herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following table sets forth the percentage relationship of expense items to operating revenue for the periods indicated.
Results of Operations
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
Operating revenue decreased $2.5 million (0.9%), to $261.0 million in 1999 from $263.5 million in 1998. The Company's growth of operating revenues was curtailed by the industry-wide shortage of experienced employee drivers and independent contractors.
Salaries, wages, and benefits increased $8.3 million (15.9%), to $60.3 million in 1999 from $52.0 million in 1998. As a percentage of revenue, salaries, wages, and benefits increased to 23.1% in 1999 from 19.7% in 1998. These increases are the result of increased reliance on employee drivers and a corresponding decrease in miles driven by independent contractors. In addition, the Company has increased employee driver pay three times since September 1, 1998. The increase in employee driver miles was attributable to internal growth in the company tractor fleet. During 1999, employee drivers accounted for 51% and independent contractors 49% of the total fleet miles, compared with 45% and 55%, respectively, in 1998.
Rent and purchased transportation decreased $9.8 million (9.7%), to $90.3 million in 1999 from $100.1 million in 1998. As a percentage of revenue, rent and purchased transportation decreased to 34.6% in 1999 from 38.0% in 1998. This reflected the Company's decreased reliance upon independent contractors. In addition, an increased industry demand for independent contractors has negated the Company's previous competitive advantage.
Operations and maintenance increased $4.1 million (15.7%), to $30.2 million in 1999 from $26.1 million in 1998. As a percentage of revenue, operations and maintenance increased to 11.6% in 1999 from 9.9% in 1998. This increase is attributable to an increase in fuel prices and increased reliance on the Company owned fleet. The fuel cost per gallon steadily increased after the first quarter of 1999 with heavy increases experienced in the fourth quarter of 1999.
Taxes and licenses decreased $0.2 million (3.5%), to $5.9 million in 1999 from $6.1 million 1998. As a percentage of revenue, taxes and licenses remained constant at 2.3% in 1999 and in 1998.
Insurance and claims decreased $1.1 million (15.7%), to $5.7 million in 1999 from $6.8 million in 1998. As a percentage of revenue, insurance and claims decreased to 2.2% in 1999 from 2.6% in 1998. The decrease was primarily attributable to the favorable settlement of claims and the lessor severity of incurred claims. Insurance and claims expense will vary as a percentage of operating revenue from period to period based on the frequency and severity of claims incurred in a given period as well as changes in claims development trends.
Communications and utilities decreased $0.1 million (2.1%), to $2.6 million in 1999 from $2.7 million in 1998. As a percentage of revenue, communications and utilities remained constant at 1.0% in 1999 and in 1998.
Depreciation decreased $1.9 million (10.4%), to $16.2 million in 1999 from $18.1 million in 1998. As a percentage of revenue, depreciation decreased to 6.2% in 1999 from 6.9% in 1998. The decrease resulted from the increase in the number of trailers in the Company's fleet becoming fully depreciated.
Other operating expenses remained constant at $5.9 million in 1999 and in 1998. As a percentage of revenue, other operating expenses increased to 2.3% in 1999 from 2.2% in 1998. Other operating expenses consists of pallet cost, driver recruiting expenses, goodwill, and administrative costs.
Primarily as a result of the foregoing, the Company's operating ratio increased to 82.9% in 1999 compared with 82.5% in 1998.
Interest income (net) increased $1.1 million (21.6%), to $6.0 million in 1999 from $4.9 million in 1998. As a percentage of revenue, interest income increased to 2.3% in 1999 from 1.9% in 1998. The Company had $126.7 million in cash, cash equivalents, and investments at December 31, 1999 compared with $143.4 million at December 31, 1998. Interest income earned is primarily exempt from federal taxes and therefore earned at a lower pre-tax rate.
The Company's effective tax rate was 34.5% in 1999 and 35% in 1998. This decrease is primarily attributable to the increase of tax-exempt interest earned.
As a result of the foregoing, net income remained constant at $33.1 million in 1999 and in 1998.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Operating revenue increased $1.0 million (0.4%), to $263.5 million in 1998 from $262.5 million in 1997. The Company's growth of operating revenues was curtailed by the industry-wide shortage of experienced employee drivers and independent contractors.
Salaries, wages, and benefits increased $2.5 million (5.0%), to $52.0 million in 1998 from $49.5 million in 1997. As a percentage of revenue, salaries, wages and benefits increased to 19.7% in 1998 from 18.9% in 1997. An increase in the percentage of employee drivers operating the Company's tractor fleet and a corresponding decrease in the percentage of the fleet being provided by independent contractors was the primary cause. This increase in employee driver miles was attributable to internal growth and the effect of a full year of operations of A & M Express which was acquired in July, 1997 and primarily relies on employee drivers. During 1998, employee drivers accounted for 45% and independent contractors 55% of the total fleet miles, compared with 43% and 57%, respectively, in 1997.
Rent and purchased transportation decreased $1.1 million (1.1%), to $100.1 million in 1998 from $101.2 million in 1997. As a percentage of revenue, rent and purchased transportation decreased to 38.0% in 1998 from 38.5% in 1997. This reflected the Company's decreased reliance upon independent contractors. In addition, an increased industry demand for independent contractors has negated the Company's previous competitive advantage.
Operations and maintenance decreased $1.7 million (6.0%), to $26.1 million in 1998 from $27.7 million in 1997. As a percentage of revenue, operations and maintenance decreased to 9.9% in 1998 from 10.5% in 1997. This decrease is attributable to a decrease in fuel prices and lower repair and maintenance costs due to the replacement of older tractors with newer models.
Taxes and licenses increased $0.1 million (1.7%), to $6.1 million in 1998 from $6.0 million 1997, primarily from an increase in fleet size. As a percentage of revenue, taxes and licenses remained constant at 2.3% in 1998 and in 1997.
Insurance and claims decreased $3.6 million (34.5%), to $6.8 million in 1998 from $10.4 million in 1997. As a percentage of revenue, insurance and claims decreased to 2.6% in 1998 from 4.0% in 1997. The decrease was primarily attributable to the favorable settlement of claims and the lessor severity of incurred claims. Insurance and claims expense will vary as a percentage of operating revenue from period to period based on the frequency and severity of claims incurred in a given period as well as changes in claims development trends.
Communications and utilities remained constant at $2.7 million in 1998 and 1997. As a percentage of revenue, communications and utilities remained constant at 1.0% in 1998 and in 1997.
Depreciation increased $1.4 million (8.1%), to $18.1 million in 1998 from $16.8 million in 1997. As a percentage of revenue, depreciation increased to 6.9% in 1998 from 6.4% in 1997. The increase resulted from a growth in the company owned fleet, as a percentage of the total fleet.
Other operating expenses increased $0.9 million (16.3%), to $5.9 million in 1998 from $5.0 million in 1997. As a percentage of revenue, other operating expenses increased to 2.2% in 1998 from 1.9% in 1997. Other operating expenses consists of pallet cost, driver recruiting expenses, goodwill, and administrative costs. The primary area of increase was higher costs associated with the recruitment of qualified employee drivers and independent contractors.
Primarily as a result of the foregoing, the Company's operating ratio was 82.5% in 1998 compared with 83.5% in 1997.
Interest income (net) increased $1.1 million (29.0%), to $4.9 million in 1998 from $3.8 million in 1997. As a percentage of revenue, interest income (net) increased to 1.9% in 1998 from 1.4% in 1997. The Company had $143 million in cash, cash equivalents, and investments at December 31, 1998 compared with $96.0 million at December 31, 1997. Interest income earned is primarily exempt from federal taxes and therefore earned at a lower pre-tax rate.
The Company's effective tax rate was 35% in 1998 and 36% in 1997. This decrease is primarily attributable to the increase in tax-exempt interest earned.
As a result of the foregoing, net income increased $3.0 million (10.1%), to $33.1 million in 1998 (12.6% of revenue) from $30.1 million in 1997 (11.5% of revenue).
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, financing revenue equipment through cash flow from operations. The Company also obtains tractor capacity by utilizing independent contractors, who provide a tractor and bear all associated operating and financing expenses.
Cash and cash equivalents and investments decreased to $126.7 million as of December 31, 1999 from $143.4 million at December 31, 1998. The Company's policy is to purchase only high quality liquid investments. Cash equivalents and investments primarily consists of municipal demand bonds and municipal demand bond funds.
Net cash provided by operations was $45.6 million in 1999, $52.7 million in 1998, and $46.8 million in 1997. The primary source of funds in 1999 was net income of $33.1 million increased by non-cash adjustments, including depreciation and amortization of $17.3 million.
Net investing activities consumed $17.7 million in 1999 and $11.6 million in 1997, and generated $14.5 million in 1998. The primary use of cash in 1999 was $18.6 million for capital expenditures, including revenue equipment. The Company expects to finance future growth in its company-owned fleet primarily through cash flow from operations and cash equivalents currently on hand.(*)
Net cash used in financing activities was $45.1 million in 1999, none in 1998, and $18.5 million in 1997. The 1999 financing activity was comprised solely of the repurchase of approximately 3.5 million shares of the Company's common stock. On February 28, 2000 the Company repurchased approximately 1.1 million shares of its outstanding common stock for $14.0 million.
Trade receivables increased to $23.5 million as of December 31, 1999 from $21.4 million as of December 31, 1998 primarily due to a 6.5% increase in fourth quarter operating revenue. Cash paid for income taxes decreased to $16.6 million in 1999 from $18.9 million in 1998. Lower income taxes on a cash basis are primarily due to increased interest income exempt from federal taxes.
Insurance accruals decreased to $34.3 million as of December 31, 1999 from $35.5 million as of December 31, 1998. The Company's insurance program for liability, physical damage and cargo damage involves self insurance retentions for the first $500,000. Claims in excess of the risk retention are covered by insurance in amounts which management considers adequate. The Company accrues the estimated cost of the uninsured portion of the pending claims. These accruals are estimated based on management's evaluation of the nature and severity of individual claims and estimate of future claims development based on historical claim development trends. If adjustments to previously established accruals are required, such amounts are included in operating expenses.
The Company has one customer who accounted for more than 10% of the Company's revenue for the year ended December 31, 1999. As disclosed in footnote two to the financial statements, historically a small number of customers generate a substantial percentage of revenue. In 1999 the Company's largest customer generated approximately 14% of operating revenue. The loss of a major customer could negatively impact the Company. Any negative impact would be mitigated by two factors: (1) the strong overall financial position of the Company (no long term debt at December 31, 1999 and $126.7 million in cash, cash equivalents and investments) and (2) the flexibility inherent in having a substantial percentage of fleet miles being generated by independent contractors who provide their own tractors.(*)
Based on the Company's strong financial position (current ratio of 3.0 and no debt), management foresees no significant barriers to obtaining sufficient financing, if necessary, to continue with growth plans. (*
Inflation and Fuel Cost
Most of the Company's operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices and the compensation paid to the drivers. Innovations in equipment technology and comfort have resulted in higher tractor prices, and there has been an industry-wide increase in wages paid to attract and retain qualified drivers. The Company historically has limited the effects of inflation through increases in freight rates and certain cost control efforts. In addition to inflation, fluctuations in fuel prices can affect profitability. Most of the Company's contracts with customers contain fuel surcharge provisions. Although the Company historically has been able to pass through most long-term increases in fuel prices and taxes to customers in the form of surcharges and higher rates, shorter-term increases are not fully recovered. (*) Seasonality
The nature of the Company's primary traffic (appliances, automotive parts, paper products, retail goods, and packaged foodstuffs) causes it to be distributed with relative uniformity throughout the year. However, earnings have historically been affected adversely during the fourth quarter as a result of reduced shipments by customers during the winter holiday season. In addition, the Company's operating expenses historically have been higher during the winter months due to increased operating costs in colder weather and higher fuel consumption due to increased engine idling.
(*) Forward - looking statements
Year 2000
In late 1999, the Company completed the remediation and testing of its systems to ensure compliance with the Year 2000. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. Costs of remediation efforts were immaterial.
The Company is not aware of any material problems resulting from Year 2000 issues, either with its internal systems or the services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (FAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - - Deferral of the Effective Date of FASB Statement No. 133. FAS 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. FAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
FAS 133, as amended, is effective for fiscal years beginning after June 15, 2000. A company may also implement FAS 133 as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998, and thereafter). FAS 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts. With respect to hybrid instrument, a company may elect to apply FAS 133, as amended, to (1) all hybrid contracts, (2) only those hybrid instruments that were issued, acquired, or substantively modified after December 31, 1997, or (3) only those hybrid instruments that were issued, acquired, or substantively modified after December 31, 1998. The Company has not yet determined the timing or impact of adoption of statement No. 133.
Forward - Looking Information
Certain matters discussed in this annual report and marked with an asterisk are "forward-looking statements" intended to qualify for the safe harbors from liability established by Private Securities Litigation Reform Act of 1995. Such statements address future plans, objectives, expectations and events or conditions concerning various matters such as capital expenditures, litigation, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company purchases only high quality liquid investments. Primarily all investments as of December 31, 1999 have an original maturity of three months or less. The Company holds all investments to maturity and therefore, is exposed to minimal market risk related to its cash equivalents and municipal bonds.
The Company has no debt outstanding as of December 31, 1999 and therefore, has no market risk related to debt.
The Company does not engage in fuel hedging with financial instruments. The Company has entered into fuel purchase contracts through March 2000. The contracts represent approximately 2% of annual fuel usage.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements, including its consolidated balance sheets and consolidated statements of operations, cash flows, and stockholders' equity, and notes related thereto, are contained at pages 17 to 27 of this report. Selected quarterly data is contained at page 26. Such information is incorporated by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information respecting executive officers, directors, and director nominee, set forth under the caption "Election of Directors-Information Concerning Executive Officers and Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" on pages 2 through 4 and 6 of the registrant's proxy statement relating to its 2000 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission in accordance with Rule 14a-6 promulgated under the Securities Exchange Act of 1934 (the "Proxy Statement"), is incorporated by reference. With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K report, the Proxy Statement is not being filed as a part hereof.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive compensation set forth under the caption "Executive Compensation" on pages 4 and 5 of the Proxy Statement is incorporated herein by reference; provided, however, that the "Board of Directors' Report on Executive Compensation" is not incorporated by reference here.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information respecting security ownership of certain beneficial owners and management included under the caption "Principal Stockholders and Stockholdings of Management" on page 7 of the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information respecting certain relationships and transactions of management set forth under the captions "Board of Directors Interlocks and Insider Participation / Certain Transactions and Relationships" on page 4 of the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Schedules
The Company's audited financial statements are set forth on the following pages of this report: Page Reports of Independent Public Accountants............................... 17 Consolidated Balance Sheets............................................. 18 Consolidated Statements of Operations................................... 19 Consolidated Statements of Stockholders' Equity......................... 20 Consolidated Statements of Cash Flows................................... 21 Notes to Consolidated Financial Statements.............................. 22-27
(a) 2. Financial Statement Schedule Page Valuation and Qualifying Accounts and Reserves.......................... 27
(a) 3. Exhibits required by Item 601 of Regulation S-K are listed below.
(b) Reports on Form 8-K
A Form 8-K was filed on October 26, 1999, pertaining the repurchase of 3,539,749 shares of the Company's outstanding common stock.
(c) Exhibits
Exhibit No. Document Page of Method of Filing
3.1 Articles of Incorporation Incorporated by reference to the Company's registration statement on Form S-1,Registration No. 33-8165, effective November 5, 1986
3.2 Bylaws Incorporated by reference to the Company's registration statement on Form S-1, Registration No. 33-8165, effective November 5, 1986
3.3 Certificate of Amendment to Incorporated by reference to the Articles of Incorporation Company's Form 10-QA, for the quarter ended June 30, 1997, dated March 26, 1998.
4.1 Articles of Incorporation Incorporated by reference to the Company's registration statement on Form S-1, Registration No. 33-8165, effective November 5, 1986
4.2 Bylaws Incorporated by reference to the Company's registration statement on Form S-1, Registration No. 33-8165, effective November 5, 1986
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 26, 1998.
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.
10.1 Business Property Lease Incorporated by reference to the between Russell A. Gerdin Company's Form 10-K for the year as Lessor and the Company ended December 31, 1996. as Lessee, regarding the Commission file no. 0-15087. Company's headquarters at 2777 Heartland Drive, Coralville, Iowa 52241
10.2 Form of Independent Contractor Incorporated by reference to the Operating Agreement between Company's Form 10-K for the year the Company and its independent ended December 31, 1993. contractor providers of tractors Commission file no. 0-15087.
10.3 Description of Key Management Incorporated by reference to the Deferred Incentive Compensation Company's Form 10-K for the year Arrangement ended December 31, 1993. Commission file no. 0-15087.
21 Subsidiaries of the Registrant Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997. Commission file no. 0-15087.
27 Financial Data Schedule Filed herewith.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized. HEARTLAND EXPRESS, INC.
Date: March 26, 2000 By: /s/ Russell A. Gerdin Russell A. Gerdin President and Secretary
Pursuant to the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ Russell A. Gerdin Chairman, President and Chief Russell A. Gerdin Executive Officer (Principal Executive Officer),Secretary March 26, 2000
/s/ John P. Cosaert Vice President of Finance John P. Cosaert (Principal Financial Officer and Principal Accounting Officer) and Treasurer March 26, 2000
/s/ Richard O. Jacobson Director Richard O. Jacobson March 26, 2000
/s/ Michael J. Gerdin Director Michael J. Gerdin March 26, 2000
/s/ Benjamin J. Allen Director Benjamin J. Allen March 26, 2000
/s/ Lawrence D. Crouse Director Lawrence D. Crouse March 26, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Heartland Express, Inc.:
We have audited the accompanying consolidated balance sheets of Heartland Express, Inc. (a Nevada corporation) and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements and schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Kansas City, Missouri January 21, 2000
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of business and Significant Accounting Policies
Nature of Business:
Heartland Express, Inc., (the "Company") is a short-to-medium-haul, irregular route, truckload carrier of general commodities. The Company's primary traffic lanes are between customer locations east of the Rocky Mountains, with selected service to the West. The Company operates the business as one reportable segment.
Significant Accounting Policies:
Principles of Consolidation:
The accompanying consolidated financial statements include the parent company, Heartland Express, Inc., and its subsidiaries, all of which are wholly owned. All material intercompany items and transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with 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.
Cash and Cash Equivalents:
Cash equivalents are short-term, highly liquid investments with original maturities of three months or less.
Investments:
Substantially all investments represent municipal bonds or municipal bond funds with a maturity of one year or less. These investments are held to maturity and stated at amortized cost. Investment income received is generally exempt from federal income taxes.
Revenue and Expense Recognition:
Operating revenues are recognized on the date the freight is delivered and expenses are recognized as incurred.
Property and Equipment:
Property and equipment are stated at cost. Generally, at the time of trade-in, the cost of new equipment is recorded at an amount equal to the net book value of the traded equipment plus cash paid. Depreciation is computed by the straight-line method for all assets other than tractors, which are depreciated by the 125% declining balance method. Trailers are depreciated to a 30% salvage value except for trailers purchased after January 1, 1996 which have no salvage value. Lives of the assets are as follows:
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Land improvements and building 3-30 Furniture and fixtures 2-3 Shop and service equipment 3-5 Revenue equipment 5-7
Assets to be disposed of are measured at the lower of carrying amount or fair market value, as estimated by management, less costs to sell.
Tires and Tubes:
The cost of tires and tubes on new revenue equipment is carried as a prepayment and amortized over the estimated tire life of two years. Replacement tires (including recapped tires) are expensed when purchased.
Earnings Per Share:
Basic earnings per share is based upon the weighted average common shares outstanding during each year. Diluted earnings per share is based upon the weighted average common and common equivalent shares outstanding during each year. Heartland has no common stock equivalents.
Reclassifications:
Certain reclassifications have been made to the prior year consolidated financial statements to conform with the current year presentation.
Note 2. Concentrations of Credit Risk and Major Customers
The Company's major customers represent the consumer goods, appliances, food products and automotive industries. Credit is usually granted to customers on an unsecured basis. The Company's five largest customers accounted for 34%, 35%, and 39% of revenues for the years ended December 31, 1999, 1998, and 1997, respectively. Operating revenue from one customer exceeded 10% of total gross revenues in 1999, 1998 and 1997. Annual revenues for this customer were $37.0 million, $37.0 million, and $39.0 million for the years ended December 31, 1999, 1998, and 1997, respectively.
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Acquisition
On July 14, 1997, the Company acquired the outstanding stock of A & M Express, Inc., (A & M) a Kingsport, Tennessee based truckload carrier. A & M, a dry van carrier, operated primarily in the eastern half of the United States. The acquisition was accounted for by the purchase method of accounting. The results of A & M's operations are reflected beginning with the effective date of the acquisition (July 1, 1997). In 1997, The company repaid approximately $18.5 million in debt which was assumed in connection with the acquisition.
Note 4. Income Taxes
Deferred income taxes are determined based upon the differences between the financial reporting and tax basis of the Company's assets and liabilities. Deferred taxes are provided at the enacted tax rates to be in effect when the differences reverse.
Deferred tax assets and liabilities as of December 31 are as follows:
The income tax provision is as follows:
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision differs from the amount determined by applying the U.S. federal tax rate as follows:
Note 5. Related Party Transactions
The Company leases two office buildings and a storage building from its president under a lease which provided for monthly rentals of $23,500 plus the payment of all property taxes, insurance and maintenance. The lease expires May 31, 2000 and contains a five year renewal option.
The total minimum rental commitment under the building lease is $117,500 for the year ending December 31, 2000.
Rent expense paid to the Company's president totaled $282,000 for the years ended December 31, 1999, 1998, and 1997. The Company also maintains cash accounts with a bank owned by the Company's president.
Note 6. Accident and Workers' Compensation Claims
Accident and workers' compensation claims include the estimated settlements, settlement expenses and an allowance for claims incurred but not yet reported for property damage, personal injury and public liability losses from vehicle accidents and cargo losses as well as workers' compensation claims for amounts not covered by insurance.
Accrued claims are determined based on estimates of the ultimate cost of settling reported and unreported claims, including expected settlement expenses. Such estimates are based on management's evaluation of the nature and severity of individual claims and an estimate of future claims development based on historical claims development trends. 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.
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company acts as a self-insurer for liability up to $500,000 for any single occurrence involving cargo, personal injury or property damage. Liability in excess of this amount is assumed by an insurance underwriter.
The Company acts as a self-insurer for workers' compensation liability up to a maximum liability of $300,000 per claim. Liability in excess of this amount is assumed by an insurance underwriter. The State of Iowa has required the Company to deposit $700,000 into a trust fund as part of the self-insurance program. This deposit has been classified with other long-term assets on the balance sheet. In addition, the Company has provided its insurance carriers with letters of credit and deposits of approximately $6.2 million in connection with its liability and workers' compensation insurance arrangements.
Note 7. Stockholders' Equity
On February 18, 1997, the Company amended its articles of incorporation to increase authorized capital to four hundred million (400,000,000) shares of capital stock (395,000,000 shares of common stock and 5,000,000 shares of preferred stock) and reduced the par value from $0.10 to $0.01 per share.
On October 26, 1999, the Company purchased 3,539,749 shares of its common stock for $45,131,800. The shares have been reported as retired in the accompanying financial statements.
Note 8. Profit Sharing Plan and Retirement Plan
The Company has a profit sharing plan with 401(k) plan features whereby the Company may make contributions to the plan at its discretion. Individual employees may make voluntary contributions to the plan. Company contributions totaled $759,000, $526,000, and $541,000, for the years ended December 31, 1999, 1998 and 1997, respectively.
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 9. Commitments and Contingencies
Various claims and legal actions are pending against the Company. In management's opinion, the resolution of these matters will not materially impact the Company's financial condition or results of operations.
The Company has entered into fuel purchase contracts through March 2000. The contracts represent approximately 2% of annual fuel usage. The aggregate commitment under the contracts is $188,874 as of December 31, 1999.
Note 11. Quarterly Financial Information (Unaudited)
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES