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, 2009 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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] 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, 2009, there were 90,688,621 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, 2009 (unaudited) and December 31, 2008 1
Consolidated Statements of Income
for the Three and Six Months Ended
June 30, 2009 and 2008 (unaudited) 2
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 2009 (unaudited) 3
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2009 4
and 2008 (unaudited)
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 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 2009 2008
---------- ----------
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 44,580 $ 56,651
Short-term investments 140 241
Trade receivables, net of
allowance for doubtful
accounts of $775 at June 30,
2009 and December 31, 2008 36,884 36,803
Prepaid tires 6,051 6,449
Other current assets 6,205 2,834
Income tax receivable 2,025 -
Deferred income taxes 36,118 35,650
---------- ----------
Total current assets $ 132,003 $ 138,628
---------- ----------
PROPERTY AND EQUIPMENT
Land and land improvements 17,442 17,442
Buildings 26,761 26,761
Furniture and fixtures 2,269 2,269
Shop and service equipment 5,345 5,290
Revenue equipment 345,252 337,799
---------- ----------
397,069 389,561
Less accumulated depreciation 156,695 151,881
---------- ----------
Property and equipment, net 240,374 237,680
---------- ----------
GOODWILL 4,815 4,815
OTHER ASSETS 5,514 5,469
LONG-TERM INVESTMENTS 160,322 171,122
---------- ----------
$ 543,028 $ 557,714
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 14,139 $ $10,338
Compensation and benefits 15,540 15,862
Income taxes payable - 452
Insurance accruals 71,804 70,546
Other accruals 7,215 7,498
---------- ----------
Total current liabilities 108,698 104,696
---------- ----------
LONG-TERM LIABILITIES
Income taxes payable 30,558 35,264
Deferred income taxes 60,966 57,715
---------- ----------
Total long-term liabilities 91,524 92,979
---------- ----------
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 90,689 in 2009 and
94,229 in 2008 907 942
Additional paid-in capital 439 439
Retained earnings 350,083 367,281
Accumulated other comprehensive loss (8,623) (8,623)
---------- ----------
342,806 360,039
---------- ----------
$ 543,028 $ 557,714
========== ==========
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)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
--------- --------- --------- ---------
Operating revenue $ 116,974 $ 164,592 $ 231,953 $ 313,641
--------- --------- --------- ---------
Operating expenses:
Salaries, wages, and benefits 42,938 48,591 86,997 97,183
Rent and purchased transportation 2,806 5,144 5,744 10,250
Fuel 25,086 60,495 49,644 110,993
Operations and maintenance 4,314 4,353 8,354 8,316
Operating taxes and licenses 2,433 2,343 4,716 4,585
Insurance and claims 4,625 7,012 8,139 10,795
Communications and utilities 906 931 1,902 1,936
Depreciation 13,160 10,663 24,974 21,076
Other operating expenses 3,188 4,139 6,591 8,471
(Gain) loss on disposal of property
and equipment (4,190) 11 (5,857) (633)
--------- --------- --------- ---------
Total operating expenses 95,266 143,682 191,204 272,972
--------- --------- --------- ---------
Operating income 21,708 20,910 40,749 40,669
Interest income 563 2,236 1,434 5,099
--------- --------- --------- ---------
Income before income taxes 22,271 23,146 42,183 45,768
Federal and state income taxes 4,656 5,915 10,427 13,874
--------- --------- --------- ---------
Net income $ 17,615 $ 17,231 $ 31,756 $ 31,894
========= ========= ========= =========
Earnings per share $ 0.19 $ 0.18 $ 0.35 $ 0.33
========= ========= ========= =========
Weighted average shares outstanding 90,689 96,158 91,582 96,186
========= ========= ========= =========
Dividends declared per share $ 0.02 $ 0.02 $ 0.04 $ 0.04
========= ========= ========= =========
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, January 1, 2009 $ 942 $ 439 $ 367,281 $ (8,623) $ 360,039
Comprehensive income:
Net income - - 31,756 - 31,756
Unrealized loss on
available-for-sale
securities, net of tax - - - - -
---------
Total comprehensive income 31,756
Dividends on common stock,
$0.04 per share - - (3,629) - (3,629)
Stock repurchase (35) - (45,325) - (45,360)
-------- --------- --------- --------- ---------
Balance, June 30, 2009 $ 907 $ 439 $ 350,083 $ (8,623) $ 342,806
======== ========= ========= ========= =========
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)
(Unaudited)
Six months ended
June 30,
2009 2008
--------- ---------
OPERATING ACTIVITIES
Net income $ 31,756 $ 31,894
Adjustments to reconcile net income
to net cash provided
by operating activities:
Depreciation 24,974 21,076
Deferred income taxes 2,783 (3,116)
Gain on disposal of property
and equipment (5,857) (633)
Changes in certain working capital items:
Trade receivables (81) (8,677)
Prepaid expenses and other current assets (2,925) (2,581)
Accounts payable, accrued liabilities,
and accrued expenses 1,810 8,277
Accrued income taxes (7,183) (2,270)
--------- ---------
Net cash provided by operating activities 45,277 43,970
--------- ---------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 4,436 1,828
Purchases of property and equipment,
net of trades (25,465) (650)
Net sale (purchases) of investments 10,901 (10,943)
Change in other assets (45) 72
--------- ---------
Net cash used in investing activities (10,173) (9,693)
--------- ---------
FINANCING ACTIVITIES
Cash dividend (1,815) (3,862)
Stock repurchase (45,360) (10,622)
--------- ---------
Net cash used in financing activities (47,175) (14,484)
--------- ---------
Net (decrease) increase in cash and
cash equivalents (12,071) 19,793
CASH AND CASH EQUIVALENTS
Beginning of period 56,651 7,960
--------- ---------
End of period $ 44,580 $ 27,753
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for income taxes, net $ 14,827 $ 19,260
Noncash investing and financing activities:
Fair value of revenue equipment traded $ 13,320 $ 1,818
Purchased property and equipment in
accounts payable $ 3,560 $ 365
Common stock dividends declared in
accounts payable $ 1,829 $ 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, 2008 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, 2009, other than
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 161,
"Disclosures about Derivative Instruments and Hedging Activities, an Amendment
of SFAS 133" ("SFAS 161") and Financial Accounting Standards Board ("FASB")
Staff Positions and SFAS as further discussed in Note 13.
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 eleven regional operating divisions located at nine different
terminal locations 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 SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". 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. Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments with insignificant
interest rate risk and original maturities of three months or less. Restricted
and designated cash and short-term investments totaling $5.5 million at June 30,
2009 and December 31, 2008, respectively, are included in non-current other
assets. The restricted funds represent deposits required by state agencies for
self-insurance purposes and designated funds that are earmarked for a specific
purpose and not for general business use.
Note 5. Investments
The Company's investments are primarily in the form of tax free, auction rate
student loan educational bonds backed by the U.S. government and are classified
as available-for-sale. As of June 30, 2009 and December 31, 2008, all of the
Company's long-term investment balance was invested in auction rate student loan
educational bonds. The investments typically have an interest reset provision of
35 days with contractual maturities that range from 5 to 38 years as of June 30,
5
2009. At the reset date, the Company has the option to roll the investments and
reset the interest rate or sell the investments in an auction. The Company
receives the par value of the investment plus accrued interest on the reset date
if the underlying investment is sold. The majority, (approximately 97% at par)
of the underlying investments are backed by the U.S. government. The remaining
3% of the student loan auction rate securities portfolio are insurance backed
securities. As of June 30, 2009, approximately 95% of the underlying investments
of the total portfolio held AAA (or equivalent) ratings from recognized rating
agencies. The remaining 5% are rated as investment grade by recognized rating
agencies.
As of June 30, 2009, all of the Company's auction rate student loan bonds were
associated with unsuccessful auctions. To date, there have been no instances of
delinquencies or non-payment of applicable interest from the issuers and all
partial calls of securities by the issuers have been at par value plus accrued
interest. Investment income received is generally exempt from federal income
taxes and is accrued as earned. Accrued interest income is included in other
current assets in the consolidated balance sheet.
The Company estimates the fair value of the auction rate securities applying the
guidance in SFAS No. 157 ("SFAS 157"). Fair value represents an estimate of what
the Company could sell the investments for in an orderly transaction with a
third party as of the June 30, 2009 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, 2009, 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,
2009 was calculated using unobservable, Level 3 inputs, as defined by SFAS 157
due to the lack of observable market inputs specifically related to student loan
auction rate securities. The fair value of these investments as of the June 30,
2009 measurement date could not be determined with precision based on lack of
observable market data and could significantly change in future measurement
periods.
The estimated fair value of the underlying investments as of June 30, 2009
declined below amortized cost of the investments as a result of liquidity issues
in the auction rate markets. With the assistance of the Company's financial
advisors, fair values of the student loan auction rate securities were
estimated, on an individual investment basis, using a discounted cash flow
approach to value the underlying collateral of the trust issuing the debt
securities considering an anticipated estimated outstanding average life of the
underlying student loans (range of two to ten years) that are the collateral to
the trusts, principal outstanding, expected rates of returns over the average
life of the underlying student loans, and payout formulas. These underlying cash
flows, by individual investment, were discounted using interest rates (range of
2.0%-8.7%) 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. Calculated fair values did not materially change
during the period ended June 30, 2009. The Company obtained an understanding of
assumptions in models used by third party financial institutions to estimate
fair value and considered these assumptions in the Company's cash flow models
but did not exclusively use the fair values provided by financial institutions
based on their internal modeling. The Company is aware that trading of student
loan auction rate securities is occurring in secondary markets, which were
considered in the Company's fair value assessment, although the Company has not
listed any of its assets for sale on the secondary market. As a result of the
fair value measurements, there were no changes to the unrealized loss and
reduction to investments, of $8.6 million, net of tax, during the period ended
June 30, 2009. The unrealized loss of $8.6 million, net of tax, is recorded as
an adjustment to accumulated other comprehensive loss and the Company has not
recognized any other than temporary impairments in the statement of income.
There were not any realized gains or losses related to these investments for the
period ended June 30, 2009.
During the third and fourth quarters of 2008, various financial institutions and
respective regulatory authorities announced proposed settlement terms in
response to various regulatory authorities alleging certain financial
institutions misled investors regarding the liquidity risks associated with
auction rate securities that the respective financial institutions underwrote,
marketed and sold. Further, the respective regulatory authorities alleged the
respective financial institutions misrepresented to customers that auction rate
securities were safe, highly liquid investments that were comparable to money
markets. Certain settlement agreements were finalized prior to December 31,
6
2008. Approximately 97% (based on par value) of our auction rate security
investments were not covered by the terms of the above mentioned settlement
agreements. The focus of the initial settlements was generally towards
individuals, charities, and businesses with small investment balances, generally
with holdings of $25 million and less. As part of the general terms of the
settlements, the respective financial institutions have agreed to provide their
best efforts in providing liquidity to the auction rate securities market for
investors not specifically covered by the terms of the respective settlements.
Such liquidity solutions could be in the form of facilitating issuer
redemptions, resecuritizations, or other means. The Company can not currently
project when liquidity will be obtained from these investments and plans to
continue to hold such securities until the securities are called, redeemed, or
resecuritized by the debt issuers.
The remaining 3.0% (based on par value) was specifically covered by a settlement
agreement which the Company signed during the fourth quarter of 2008. By signing
the settlement agreement, the Company relinquished its rights to bring any
claims against the financial institution, as well, as its right to serve as a
class representative or receive benefits under any class action. Further, the
Company no longer has the sole discretion and right to sell or otherwise dispose
of, and/or enter orders in the auction process with respect to the underlying
securities. As part of the settlement, the Company obtained a put option to sell
the underlying securities to the financial institution, which is exercisable
during the period starting on June 30, 2010 through July 2, 2012, plus accrued
interest. Should the financial institution sell or otherwise dispose of our
securities the Company will receive the par value of the securities plus accrued
interest one business day after the transaction. Upon signing the settlement
agreement, the Company no longer maintains the intent and ability to hold the
underlying securities for recovery of the temporary decline in fair value. The
Company also acquired an asset, a put option, which is valued as a stand alone
financial instrument separate from the underlying securities. There was not any
significant change in the value of the put option during the period ended June
30, 2009. The value of these securities is included in long-term investments per
the consolidated balance sheet.
The Company has evaluated the unrealized loss on securities other than
securities covered by the settlement agreement discussed above to determine
whether this decline is other than temporary. Management has concluded the
decline in fair value to be temporary based on the following considerations.
o Current market activity and the lack of severity or extended
decline do not warrant such action at this time.
o Since auction failures began in February 2008, the Company has
received approximately $28.8 million as the result of partial
calls by issuers. The Company received par value for the amount
of these calls plus accrued interest.
o Based on the Company's financial operating results, operating
cash flows and debt free balance sheet, the Company has the
ability and intent to hold such securities until recovery of the
unrealized loss.
o There have not been any significant changes in collateralization
and ratings of the underlying securities since the first failed
auction. The Company continues to hold 95% of the auction rate
security portfolio in senior positions of AAA (or equivalent)
rated securities.
o The Company is aware of recent increases in default rates of the
underlying student loans that are the assets to the trusts
issuing the auction rate security debt, which management believes
is due to current overall economic conditions. As the underlying
loans are guaranteed by the U.S. Government, defaults of the
loans accelerate payment of the underlying loan to the trust. As
trusts are no longer recycling repayment money for new loans,
accelerated repayment of any student loan to the underlying trust
would increase cash flows of the trust which would potentially
result in partial calls by the underlying trusts.
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 as well as improve
overall liquidity in the student loan auction rate market. This
has the potential to impact existing securities with underlying
student loans.
o All of the auction rate securities are held with financial
institutions that have agreed in principle to settlement
agreements with various regulatory agencies to provide liquidity.
Although the principles of the respective settlement agreements
7
focus mostly on small investors (generally companies and
individual investors with auction rate security assets less than
$25 million) the respective settlements state the financial
institutions will work with issuers and other interested parties
to use their best efforts to provide liquidity solutions to
companies not specifically covered by the principle terms of the
respective settlements by the end of 2009 in certain settlement
agreements. Regulatory agencies continue to monitor the progress
of the respective financial institutions towards this goal.
Management will monitor its investments and ongoing market conditions in future
periods to assess impairments considered to be other than temporary. Should
estimated fair value continue to remain below cost or the fair value decrease
significantly from current fair value due to credit related issues, the Company
may be required to record an impairment of these investments through a charge in
the consolidated statement of income.
The table below presents a reconciliation for all assets and liabilities,
measured at fair value, on a recurring basis using significant unobservable
inputs (Level 3) during the six month period ended June 30, 2009.
Available-for-sale
Level 3 Fair Value Measurements debt securities
(in thousands)
Balance, December 31, 2008 $ 171,122
Purchases, sales, issuances, and settlements (10,800)
Transfers in to (out of) Level 3 -
Total gains or losses (realized/unrealized):
Included in earnings -
Included in other comprehensive loss -
-----------------
Balance, June 30, 2009 $ 160,322
=================
The amortized cost and fair value of investments at June 30, 2009 and December
31, 2008 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
June 30, 2009: (in thousands)
Current:
Municipal bonds $ 140 - $ - $ 140
Long-term
Auction rate student
loan educational bonds 169,200 - 8,878 160,322
---------- ---------- ---------- ---------
$ 169,340 - $ 8,878 $ 160,462
========== ========== ========== =========
December 31, 2008:
Current:
Municipal bonds $ 241 - - $ 241
Long-term
Auction rate student
loan educational bonds 180,000 - 8,878 171,122
---------- ---------- ---------- ---------
$ 180,241 - $ 8,878 $ 171,363
========== ========== ========== =========
8
Note 6. Fuel Hedging
In February 2007, the Board of Directors authorized the Company to begin hedging
activities related to projected future purchases of diesel fuel. During the
quarter ended March 31, 2009, the Company contracted with an unrelated third
party to hedge changes in forecasted future cash flows related to fuel
purchases. The hedge of changes in forecasted future cash flows was transacted
through the use of certain swap derivative financial instruments. The Company
accounts for derivative instruments in accordance with the provisions of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", ("SFAS
133") as amended, and SFAS 161, and has designated such swaps as cash flow
hedges. The cash flow hedging strategy was implemented mainly to reduce the
Company's exposure to significant changes, including upward movements in diesel
fuel prices related to fuel consumed by empty and out-of-route miles and truck
engine idling time which is not recoverable through fuel surcharge agreements.
Under SFAS 133, the Company was required to record an asset or liability for the
fair value of any derivative instrument designated as a cash flow hedge with an
offsetting amount recorded to accumulated other comprehensive income (loss) for
the effective portion of the change in fair value as defined by SFAS 133 and an
increase or decrease to fuel expense for the ineffective portion of the change
in fair value as defined by SFAS 133. Any previous amounts included in other
comprehensive income (loss) are reclassified as increases (decreases) in fuel
expense in the period the related contracts settle.
As of June 30, 2009 there were no open unsettled cash flow hedges. The Company
has not hedged any amounts of fuel beyond June 30, 2009. As of June 30, 2009
there were not any assets or liabilities recorded in the consolidated balance
other than a receivable for $0.3 million from the hedge counterparty for payment
due for the June contract settlement. As the contract expired on June 30, 2009,
all amounts recorded in accumulated other comprehensive loss as of June 30, 2009
related to the cash flow hedge was reclassified into income during the quarter
ended June 30, 2009 as a reduction to fuel expense. Based on favorable contract
settlements of open hedge positions at March 31, 2009 fuel expense was reduced
by $0.6 million during the quarter ended June 30, 2009.
The following table details the effect of derivative financial instruments on
the consolidated balance sheet and statements of income for the period ended
June 30, 2009. There was not any derivative instruments outstanding as of
December 31, 2008 or during the period ended June 30, 2008.
Location of Gain
or (Loss) Amount of Gain or
Amount of Gain Recognized in (Loss) Recognized
Amount of Gain Location of Gain or (Loss) Income on in Income on
or (Loss) or (Loss) Reclassified Derivative Derivative
Recognized in Reclassified from from (Ineffective (Ineffective
Derivatives in OCI on Accumulated OCI Accumulated OCI Portion and Amount Portion and Amount
SFAS 133 Cash Derivative into income into Income Excluded from Excluded from
Flow Hedging (Effective (Effective (Effective Effectiveness Effectiveness
Relationship Portion) Portion) Portion) Testing) Testing)
----------------- ----------------- ------------------- ----------------- -------------------- ------------------
(000's)
Fuel contract $ - Fuel expense $ 125 Fuel expense $ 561
Note 7. 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.
Effective January 1, 2009, the Company changed its estimate of depreciation
expense on tractors acquired subsequent to January 1, 2009, to 150% declining
balance, to better reflect the estimated trade value of the tractors at the
estimated trade date. The change was the result of current tractor trade values
and the expected values in the trade market for the foreseeable future. Tractors
acquired prior to December 31, 2008 will continue to be depreciated using the
125% declining balance method. The change in estimate increased depreciation
expense by approximately $0.3 million during the three and six month periods
ended June 30, 2009. Tractors are depreciated to salvage values of $15,000 while
trailers are depreciated to salvage values of $4,000.
9
Note 8. Earnings Per Share:
Earnings per share are based upon the weighted average common shares outstanding
during each period. The Company has no common stock equivalents; therefore,
diluted earnings per share are equal to basic earnings per share.
Note 9. Dividends
On June 8, 2009, the Company's Board of Directors declared a regular quarterly
dividend of $0.02 per common share, approximately $1.8 million, payable July 2,
2009 to shareholders of record at the close of business on June 19, 2009. On
July 2, 2009, the Company paid the $1.8 million dividend.
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 10. 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.
At June 30, 2009 and December 31, 2008, the Company had a total of $20.2 million
and $22.9 million in gross unrecognized tax benefits respectively. Of these
amounts, $13.2 million and $14.9 million respectively, represented the amount of
unrecognized tax benefits that, if recognized, would impact our effective tax
rate. Unrecognized tax benefits were reduced by approximately $2.4 million and
$2.2 million during the periods ended June 30, 2009 and 2008, respectively, due
to the expiration of certain statute of limitations net of current period
additions of $0.2 million during the quarter ended June 30, 2009 and no
additions during the quarter ended June 30, 2008. Unrecognized tax benefits were
reduced by approximately $2.7 million and $3.2 million during the six month
periods ended June 30, 2009 and 2008, respectively, due to the expiration of
certain statute of limitations net of additions of $1.0 million during the six
month period ended June 30, 2009 and no additions during the six month period of
June 30, 2008. The total amount of accrued interest and penalties for such
unrecognized tax benefits was $10.3 million at June 30, 2009 and $12.3 million
at December 31, 2008. Net interest and penalties included in income tax expense
for the period ended June 30, 2009 and 2008 was a benefit of approximately $1.4
million and $0.4 million, respectively. Net interest and penalties included in
income tax expense for the six month period ended June 30, 2009 and 2008 was a
benefit of approximately $1.9 million and $0.2 million, respectively. 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 20.9% and 25.6%, respectively, in the three
months ended June 30, 2009 and 2008 and 24.7% and 30.3% for the six months ended
June 30, 2009. The decrease in the effective tax rate for the three and six
month periods ending June 30, 2009 is primarily attributable to a favorable
income tax expense adjustment as a result of the application of FASB
Interpretation No. 48 ("FIN 48"), as discussed above, on less taxable income
during the current year compared to the same period of 2008.
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. The
10
Company has closed the examination that was ongoing as of March 31, 2009 with no
material impact and the Company does not have any outstanding litigation related
to tax matters. At this time, management's best estimate of the reasonably
possible net change in the amount of unrecognized tax benefits for the next
twelve months to be a decrease of approximately $2.6 to $3.6 million mainly due
to the expiration of certain statute of limitations.
The federal statute of limitations remains open for the years 2006 and forward.
Tax years 1999 and forward are subject to audit by state tax authorities
depending on the tax code and administrative practice of each state.
Note 11. 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, 2009 and has no expiration date. The
repurchase program may be suspended or discontinued at any time without prior
notice. Approximately 6.5 million shares remain authorized for repurchase under
the Board of Directors' approval.
The Company repurchased the following shares of common stock under the
above-described repurchase plan:
Six Months Ended June 30,
-------------------------
2009 2008
----------- -----------
Shares of Common Stock Repurchased (in Millions) 3.5 0.8
Value of stock repurchased (in Millions) $ 45.4 $ 10.6
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.
During 2008 the Company entered into a commitment for a tractor fleet upgrade.
The commitment includes 1,600 trucks for delivery in 2009. The total estimated
purchase commitment is $115 million. The delivery of the equipment began during
the third quarter of 2008 and is expected to continue throughout 2009. As of
June 30, 2009 the Company had approximately $62 million of this net commitment
remaining of which the Company had approximately $3.5 million of equipment
purchases recorded in accounts payable and accrued liabilities.
Note 13. Accounting Pronouncements
In April 2009, the FASB issued three related Staff Positions to clarify the
application of SFAS 157 to fair value measurements in the current economic
environment, modify the recognition of other-than-temporary impairments of debt
securities, and require companies to disclose the fair values of financial
instruments in interim periods ("SFAS 157 SOP's"). The SFAS 157 SOP's are
effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The Company adopted
the SFAS 157 SOP's during the quarter ended June 30, 2009 and the SFAS 157 SOP's
did not have any effect on the financial position, results of operations, and
cash flows of the Company.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165")
which became effective for interim or annual financial periods ending after June
15, 2009. The objective of SFAS 165 was to establish general standards of
accounting for disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. Management
11
has evaluated subsequent disclosure events through July 31, 2009, the date the
financial statements were available to be issued. Events requiring subsequent
event disclosure have been provided in the notes to the consolidated financial
statements.
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 operated eleven regional
operating divisions that provided regional dry van truckload services from nine
regional operating centers in addition to its corporate headquarters during the
quarter ended June 30, 2009. The Company's eleven regional operating divisions,
not including operations at the corporate headquarters, accounted for 72.6% and
73.4% of operating revenues for the second quarter of 2009 and 2008,
respectively, and 72.9% and 73.5% of operating revenues for the six month period
ended June 30, 2009 and 2008, respectively. The Company's newest regional
operating center near Dallas, Texas opened in early January 2009. 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. Fuel prices soared to historical highs
through the first half of 2008 and declined throughout the second half of 2008.
The trend in the decline of fuel prices continued in the first quarter of 2009
and remained relatively stable throughout the quarter ended June 30, 2009 with a
slight increase late in the quarter. The industry experienced soft freight
demand throughout 2008 which has continued to weaken during 2009. This continues
to put downward pressure on freight rates. In addition, the decline in fuel
prices from highs in 2008 has resulted in a decline in fuel surcharge revenues,
which were lower during the second quarter of 2009. The industry continues to
fight excess capacity in the market along with declining freight volumes due to
the current economic downturn. During 2008, the Company initiated strategies to
effectively manage fuel costs. These initiatives included encouraging fueling at
terminal locations rather than over-the-road purchases to take advantage of bulk
fuel purchases when cost effective to do so, reduction of tractor idle time, and
controlling out-of-route miles. Fuel expense was reduced approximately $35.4
million for the current quarter compared to the same quarter of prior year and
$61.3 million year to date mainly due to reduced price of fuel and lower volumes
due to lower miles driven as well as the initiatives previously mentioned. At
June 30, 2009, the Company's tractor fleet had an average age of 2.2 years while
the trailer fleet had an average age of 5.1 years compared to 2.5 years average
age of tractor fleet and 4.3 years average age of trailer fleet a year ago. The
Company's average age of the tractor fleet is expected to continue to decrease
throughout the remainder of 2009 as the Company continues with the current fleet
12
upgrade campaign. The Company continues to focus on growing internally by
providing quality service to targeted customers with a high density of freight
in the Company's regional operating areas. In addition to the development of its
regional operating centers, the Company has made five acquisitions since 1987.
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 acquisition opportunities, and the availability of
experienced drivers.
The Company ended the second quarter of 2009 with operating revenues of $117.0
million, including fuel surcharges, net income of $17.6 million, and earnings
per share of $0.19 on average outstanding shares of 90.7 million. The Company
posted an 81.4% operating ratio (operating expenses as a percentage of operating
revenues) and a 15.1% 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 $205.0 million and a debt-free balance sheet. The
Company had total assets of $543.0 million at June 30, 2009. The Company
achieved a return on assets of 12.9% and a return on equity of 20.2% for the
twelve months ended June 30, 2009, compared to the twelve months ended June 30,
2008, which were 12.5% and 19.3%, respectively. The Company's cash flow from
operations for the first six months of 2009 of $45.3 million represented a 3.0%
increase from the same period of 2008 mainly due to a $4.5 million increase in
net income adjusted for non-cash items offset by a decrease in cash flows from
working capital items which were attributable to trade receivable cash
collections, timing of certain accounts payable and accrued expense items, and
income tax accrual reductions. The Company's cash flow from operations was 19.5%
of operating revenues for the six months ended June 30, 2009 compared to 14.0%
for the same period in 2008.
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,
2009 2008 2009 2008
------ ------ ------ ------
Operating revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating expenses:
Salaries, wages, and benefits 36.7% 29.5% 37.5% 31.0%
Rent and purchased transportation 2.4 3.1 2.5 3.3
Fuel 21.4 36.8 21.4 35.4
Operations and maintenance 3.7 2.6 3.6 2.7
Operating taxes and licenses 2.1 1.4 2.0 1.5
Insurance and claims 4.0 4.3 3.5 3.4
Communications and utilities 0.8 0.6 0.8 0.6
Depreciation 11.3 6.5 10.8 6.7
Other operating expenses 2.7 2.5 2.8 2.7
Gain on disposal of property
and equipment (3.6) - (2.5) (0.2)
------ ------ ------ ------
Total operating expenses 81.4% 87.3% 82.4% 87.0%
------ ------ ------ ------
Operating income 18.6% 12.7% 17.6% 13.0%
Interest income 0.5 1.4 0.6 1.6
------ ------ ------ ------
Income before income taxes 19.0% 14.1% 18.2% 14.6%
Federal and state income taxes 4.0 3.6 4.5 4.4
------ ------ ------ ------
Net income 15.1% 10.5% 13.7% 10.2%
====== ====== ====== ======
The following is a discussion of the results of operations of the three and six
month period ended June 30, 2009 compared with the same period in 2008.
13
Three Months Ended June 2009 and 2008
Operating revenue decreased $47.6 million (28.9%), to $117.0 million in the
second quarter of 2009 from $164.6 million in the second quarter of 2008. The
decrease in revenue resulted from a decrease in fuel surcharge revenue of $26.4
million to $12.0 million, further reduced by a decrease in line haul revenue of
approximately $21.2 million. The decrease in fuel surcharge revenue was a direct
result of a decrease in average fuel costs during the period as further
explained below. Fuel surcharge revenue was $38.4 million in the second quarter
of 2008. The decrease in line haul revenue was directly attributable to a
reduction in fleet miles, $19.5 million, as a direct result of an overall
decline in market demand for freight, further reduced by line haul rates and
other line haul related revenues, $1.7 million.
Salaries, wages, and benefits decreased $5.7 million (11.7%), to $42.9 million
in the second quarter of 2009 from $48.6 million in the second quarter of 2008.
The decrease in salaries, wages and benefits was the direct result of decreases
of company driver wages due to a decrease in total fleet miles as a direct
result of an overall decline in market demand for freight. Other net
compensation did not materially change. The mix of the number of employee
drivers to independent contractors remained unchanged at a mix of 96% company
drivers and 4% independent contractors during the quarters ended June 30, 2009
and 2008.
Rent and purchased transportation decreased $2.3 million (45.1%), to $2.8
million in the second quarter of 2009 from $5.1 million in the second quarter of
2008. Rent and purchased transportation for both periods includes amounts paid
to independent contractors under the Company's fuel stability program. The
decrease reflects the decrease in miles driven by independent contractors ($0.8
million) and a decrease of amounts paid under the Company's fuel stability
program ($1.2 million) due to decreases in fuel prices. Other equipment rental
expenses decreased $0.3 million.
Fuel decreased $35.4 million (58.5%), to $25.1 million for the three months
ended June 30, 2009 from $60.5 million for the same period of 2008. The decrease
is the result of decreased fuel prices, decreased miles driven, and an increase
in fuel economy as result of newer tractor fleet as well as our idle reduction
initiatives. The Company's fuel cost per mile per company-owned tractor mile
decreased 51.0% in second quarter of 2009 compared to 2008. Fuel cost per mile,
net of fuel surcharge, decreased 33.1% in the second quarter of 2009 compared to
2008. The Company's second quarter fuel cost per gallon, $2.10 per gallon,
decreased by 50.1% in 2009 compared to the same period of 2008, $4.21 per
gallon. Fuel expense during the quarter ended June 30, 2009 was net of the
benefit of the Company's fuel hedging efforts based on gains of $0.6 million for
settlements received on fuel derivative contracts.
Insurance and claims decreased $2.4 million (34.3%), to $4.6 million in the
second quarter of 2009 from $7.0 million in the second quarter of 2008 due to a
decrease in the number of occurrences and severity of larger claims.
Depreciation increased $2.5 million (23.4%), to $13.2 million during the second
quarter of 2009 from $10.7 million in the second quarter of 2008. The increase
is mainly attributable to an increase in tractor purchases for the twelve month
periods leading up to and including the quarter ended June 30, 2009. As tractors
are depreciated using the declining balance method, depreciation expense
declines in years subsequent to the first year after initial purchase. Tractors
purchased prior to January 1, 2009 are depreciated using the 125% declining
balance method. Tractors purchased subsequent to January 1, 2009 are being
depreciated using the 150% declining balance method, which increased tractor
depreciation $0.3 million during the quarter ended June 30, 2009 compared to the
same period of 2008. During the second half of 2008 and the first six months of
2009 the Company has placed in service 1,036 new tractors which have a higher
base cost than previous tractors purchased and are in the first year of
depreciation. Tractor depreciation increased $2.5 million to $9.8 million in the
quarter ended June 30, 2009 from $7.3 million in the quarter ended June 30,
2008. The increase in tractor depreciation was offset by a decrease of $0.1
million in trailer depreciation for the three months ended June 30, 2009
compared to the same period of 2008. The decrease in trailer depreciation was
the direct result of a portion of our trailer fleet being depreciated to the
estimated salvage value of the respective trailers.
Other operating expenses decreased $0.9 million (22.0%), to $3.2 million in the
second quarter of 2009 from $4.1 million in the second quarter of 2008. Other
14
operating expenses consists of costs incurred for advertising expense, freight
handling, highway tolls, driver recruiting expenses, and administrative costs
which have decreased mainly due to lower load counts, driver miles and less
driver recruiting.
The Company recorded a gain on the disposal of property and equipment of $4.2
million during the second quarter of 2009 as compared to a minimal loss in the
second quarter of 2008. There were no tractor trades during the quarter ended
June 30, 2008.
Interest income decreased $1.6 million (72.7%) in the second quarter of 2009
compared to the 2008 period. The decrease is mainly the result of lower average
returns due to the decline in interest rates applicable to short and long-term
investments which the Company saw throughout 2008 and continued into 2009 as
well as lower average balances of investments due to partial calls received on
ARS.
The Company's effective tax rate was 20.9% and 25.6%, respectively, in the three
months ended June 30, 2009 and 2008. The decrease in the effective tax rate for
the three and six month periods ending June 30, 2009 is primarily attributable
to a favorable income tax expense adjustment as a result of the application of
FASB Interpretation No. 48 ("FIN 48"), as discussed above, on less taxable
income during the current year compared to the same period of 2008.
As a result of the foregoing, the Company's operating ratio (operating expenses
as a percentage of operating revenue) was 81.4% during the second quarter of
2009 compared with 87.3% during the second quarter of 2008. Net income increased
$0.4 million (2.3%), to $17.6 million during the second quarter of 2009 from
$17.2 million during the second quarter of 2008.
Six Months Ended June 2009 and 2008
Operating revenue decreased $81.6 million (26.0%), to $232.0 million in the six
months ending June 30, 2009 from $313.6 million in the 2008 period. The decrease
in revenue resulted from a decrease in fuel surcharge revenue of $42.8 million
to $23.4 million, further reduced by a decrease in line haul revenue of
approximately $38.8 million. The decrease in fuel surcharge revenue was a direct
result of a decrease in average fuel costs during the period as further
explained below. Fuel surcharge revenue was $66.2 million for the six months
ended June 30, 2008. The decrease in line haul revenue was directly attributable
to a reduction in fleet miles, $36.1 million, as a direct result of an overall
decline in market demand for freight, further reduced by line haul rates and
other line haul related revenues, $2.7 million.
Salaries, wages, and benefits decreased $10.2 million (10.5%), to $87.0 million
in the six months ended June 30, 2009 from $97.2 million in the 2008 period. The
decrease in salaries, wages and benefits was the direct result of decreases of
company driver wages due to a decrease in total fleet miles as a direct result
of an overall decline in market demand for freight. Other net compensation did
not materially change. The mix of the number of employee drivers to independent
contractors remained unchanged at a mix of 96% company drivers and 4%
independent contractors during the periods ended June 30, 2009 and 2008.
Rent and purchased transportation decreased $4.6 million (44.7%), to $5.7
million in the first six months of 2009 from $10.3 million in the compared
period of 2008. Rent and purchased transportation for both periods includes
amounts paid to independent contractors under the Company's fuel stability
program. The decrease reflects the decrease in miles driven by independent
contractors ($1.9 million) and a decrease of amounts paid under the Company's
fuel stability program ($2.2 million) due to decreases in fuel prices. Other
equipment rental expenses decreased $0.5 million.
Fuel decreased $61.4 million (55.3%), to $49.6 million for the six months ended
June 30, 2009 from $111.0 million for the same period of 2008. The decrease is
the net result of decreased fuel prices ($45.5 million) and a decrease in miles
driven and idle reduction initiatives ($15.9 million). The Company's fuel cost
per company-owned tractor mile decreased 47.8% in first six months of 2009
compared to the same period of 2008. Fuel cost per mile, net of fuel surcharge,
decreased 34.1% in the first six months of 2009 compared to the same period of
2008. The Company's fuel cost per gallon for the first six months of 2009, $2.04
per gallon, decreased by 46.3% in 2009 compared to the same period of 2008,
15
$3.80 per gallon. Fuel expense during the six months ended June 30, 2009 was net
of the benefit of the Company's fuel hedging efforts based on gains of $0.6
million for settlements received on fuel derivative contracts.
Insurance and claims decreased $2.7 million (25.0%), to $8.1 million in the
second quarter of 2009 from $10.8 million in the second quarter of 2008 due to a
decrease in the number of occurrences and severity of larger claims.
Depreciation increased $3.9 million (18.5%), to $25.0 million during the six
months ended June 30, 2009 from $21.1 million in the six months ended June 30,
2008. The increase is mainly attributable to an increase in tractor purchases
for the twelve month periods leading up to and including the quarter ended June
30, 2009. As tractors are depreciated using the declining balance method,
depreciation expense declines in years subsequent to the first year after
initial purchase. Tractors purchased prior to January 1, 2009 are depreciated
using the 125% declining balance method. Tractors purchased subsequent to
January 1, 2009 are being depreciated using the 150% declining balance method,
which increased tractor depreciation $0.3 million during the six months ended
June 30, 2009 compared to the same period of 2008. During the second half of
2008 and the first six months of 2009 the Company has placed in service 1,036
new tractors which have a higher base cost than previous tractors purchased and
are in the first year of depreciation. Tractor depreciation increased $4.0
million to $18.2 million in the six months ended June 30, 2009 from $14.2
million in the same period of 2008. The increase in tractor depreciation was
offset by a decrease of $0.3 million in trailer depreciation for six months
ended June 30, 2009 compared to the same period of 2008. The decrease in trailer
depreciation was the direct result of a portion of our trailer fleet being
depreciated to the estimated salvage value of the respective trailers. Other
depreciation increased $0.2 million.
Other operating expenses decreased $1.9 million (22.4%), to $6.6 million during
the six months ended June 30, 2009 from $8.5 million in the same period of 2008.
Other operating expenses consists of costs incurred for advertising expense,
freight handling, highway tolls, driver recruiting expenses, and administrative
costs which have decreased mainly due to lower load counts, driver miles and
less driver recruiting.
Gain on the disposal of property and equipment increased $5.3 million, to $5.9
million during the six months ended June 30, 2009 from $0.6 million in the same
period of 2008. The gain increase is mainly attributable to an increase in the
number of tractors traded or sold during the 2009 period compared to the 2008
period.
Interest income decreased $3.7 million (72.5%), to $1.4 million in the six
months ended June 30, 2009 from $5.1 million in the same period of 2008. The
decrease is mainly the result of lower average returns due to the decline in
interest rates applicable to short and long-term investments which the Company
saw throughout 2008, and continued into 2009 as well as lower average balances
of investments due to partial calls received on ARS.
The Company's effective tax rate was 24.7% and 30.3% for the six months ended
June 30, 2009. The decrease in the effective tax rate for the three and six
month periods ending June 30, 2009 is primarily attributable to a favorable
income tax expense adjustment as a result of the application of FASB
Interpretation No. 48 ("FIN 48"), as discussed above, on less taxable income
during the current year compared to the same period of 2008.
As a result of the foregoing, the Company's operating ratio (operating expenses
as a percentage of operating revenue) was 82.4% during the first six months of
2009 compared with 87.0% during the first six months of 2008. Net income
decreased $0.1 million to $31.8 million during the first six months of 2009 from
$31.9 million during the compared 2008 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, which was the case
during 2008 and the six months ended June 30, 2009 with the purchase of 1,036
new tractors and 400 new trailers that were acquired during the third and fourth
quarters of 2008 and the first and second quarters of 2009. The Company expects
to purchase more tractors during the third and fourth quarters of 2009 to
complete the current tractor upgrade campaign of 1,600 new tractor deliveries
during 2009. 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
16
ended June 30, 2009, was net cash provided by operating activities of $45.3
million compared to $44.0 million in 2008. This was primarily a result of net
income (excluding non-cash depreciation, deferred tax, and gains on disposal of
equipment) being approximately $4.5 million higher in 2009 compared to 2008
offset by a decrease in cash flow generated by operating assets and liabilities
of approximately $3.2 million. The net decrease in cash provided by operating
assets and liabilities for the first six months of 2009 compared to the same
period of 2008 was primarily the result of reductions in accounts receivable
balances due to collections offset by reductions in accounts payable and accrued
expenses. The increase in accident claims during the six month period ending
June 30, 2008 did not recur in the six month period ending June 30, 2009.
Additionally there were reductions in accrued income taxes mainly due to
uncertain tax position accrual changes and certain net income taxes paid during
the quarter. Cash flow from operating activities was 19.5% of operating revenues
in 2009 compared with 14.0% in 2008.
Capital expenditures for property and equipment, net of trade-ins, totaled $25.5
million for the six months ended June 30, 2009 compared to $0.1 million during
the same period of 2008. Investing cash flows during the first six months of
2009 were mainly attributable to the Company's tractor fleet upgrade program.
There were not any significant capital expenditures during the first six months
of 2008. The Company received $10.9 million in cash during the six month period
ended June 30, 2009 related to partial calls of ARS compared to $10.9 million
net investment in ARS's prior to auction failures in February 2008. The increase
in proceeds from sale of property and equipment was directly related to cash
received under the Company's tractor fleet upgrade program.
The Company paid $1.8 million in dividends during the first six months of 2009
compared to cash dividends of $3.9 million paid in six month period ended June
30, 2008. The dividend declared in the fourth quarter 2008 was paid in the
fourth quarter of 2008 where as the dividend declared in the fourth quarter of
2007 was paid in the first quarter of 2008. The Company declared a $1.8 million
cash dividend in June 2009, included in accounts payable and accrued liabilities
at June 30, 2009, which was paid on July 2, 2009.
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, 2009
and has no expiration date. During the six months ended June 30, 2009,
approximately 3.5 million shares of the Company's common stock were repurchased
for approximately $45.4 million at approximately $12.81 per share. The
repurchased shares were subsequently retired. There were approximately 0.8
million shares repurchased for $10.6 million at approximately $13.40 per share
during the six month period ended June 30, 2008. At June 30, 2009, the Company
has approximately 6.5 million shares remaining under the current Board of
Director repurchase authorization. Future purchases are dependent upon market
conditions.
The Company paid income taxes, net, of $14.8 million in 2009 which was $4.5
million lower than income taxes paid during the same period in 2008 of $19.3
million. The decrease is mainly driven by lower estimated federal income tax
payments based on expected taxable income for the year ending December 31, 2009.
Management believes the Company has adequate liquidity to meet its current and
projected needs. Management believes the Company will continue to have
significant capital requirements over the long-term which are expected to be
funded from cash flows provided by operations and from existing cash, cash
equivalents and investments. The Company's balance sheet remains debt free. The
Company ended the quarter with $205.0 million in cash, cash equivalents and
investments a decrease of $23.0 million from December 31, 2008. This decrease
was mainly driven by stock repurchases and purchases of equipment totaling $70.8
million, net of cash flows provided by operating activities.
The Company's investments are primarily in the form of tax free, auction rate
student loan educational bonds backed by the U.S. government and are classified
as available-for-sale. As of June 30, 2009 and December 31, 2008, all of the
Company's long-term investment balance was invested in auction rate student loan
educational bonds. The investments typically have an interest reset provision of
35 days with contractual maturities that range from 5 to 38 years as of June 30,
2009. At the reset date, the Company has the option to roll the investments and
reset the interest rate or sell the investments in an auction. The Company
receives the par value of the investment plus accrued interest on the reset date
if the underlying investment is sold. The majority, (approximately 97% at par)
of the underlying investments are backed by the U.S. government. The remaining
3% of the student loan auction rate securities portfolio are insurance backed
17
securities. As of June 30, 2009, approximately 95% of the underlying investments
of the total portfolio held AAA (or equivalent) ratings from recognized rating
agencies. The remaining 5% are rated as investment grade by recognized rating
agencies.
As of June 30, 2009, all of the Company's auction rate student loan bonds were
associated with unsuccessful auctions. To date, there have been no instances of
delinquencies or non-payment of applicable interest from the issuers and all
partial calls of securities by the issuers have been at par value plus accrued
interest. Investment income received is generally exempt from federal income
taxes and is accrued as earned. Accrued interest income is included in other
current assets in the consolidated balance sheet.
The Company estimates the fair value of the auction rate securities applying the
guidance in SFAS No. 157 ("SFAS 157"). Fair value represents an estimate of what
the Company could sell the investments for in an orderly transaction with a
third party as of the June 30, 2009 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, 2009, 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,
2009 was calculated using unobservable, Level 3 inputs, as defined by SFAS 157
due to the lack of observable market inputs specifically related to student loan
auction rate securities. The fair value of these investments as of the June 30,
2009 measurement date could not be determined with precision based on lack of
observable market data and could significantly change in future measurement
periods.
The estimated fair value of the underlying investments as of June 30, 2009
declined below amortized cost of the investments, as a result of liquidity
issues in the auction rate markets. With the assistance of the Company's
financial advisors, fair values of the student loan auction rate securities were
estimated, on an individual investment basis, using a discounted cash flow
approach to value the underlying collateral of the trust issuing the debt
securities considering an anticipated estimated outstanding average life of the
underlying student loans (range of two to ten years) that are the collateral to
the trusts, principal outstanding, expected rates of returns over the average
life of the underlying student loans, and payout formulas. These underlying cash
flows, by individual investment, were discounted using interest rates (range of
2.0%-8.7%) 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. Calculated fair values did not materially change
during the period ended June 30, 2009. The Company obtained an understanding of
assumptions in models used by third party financial institutions to estimate
fair value and considered these assumptions in the Company's cash flow models
but did not exclusively use the fair values provided by financial institutions
based on their internal modeling. The Company is aware that trading of student
loan auction rate securities is occurring in secondary markets, which were
considered in the Company's fair value assessment, although the Company has not
listed any of its assets for sale on the secondary market. As a result of the
fair value measurements, there were no changes to the unrealized loss and
reduction to investments, of $8.6 million, net of tax, during the period ended
June 30, 2009. The unrealized loss of $8.6 million, net of tax, is recorded as
an adjustment to accumulated other comprehensive loss and the Company has not
recognized any other than temporary impairments in the statement of income.
There were not any realized gains or losses related to these investments for the
period ended June 30, 2009.
During the third and fourth quarters of 2008, various financial institutions and
respective regulatory authorities announced proposed settlement terms in
response to various regulatory authorities alleging certain financial
institutions misled investors regarding the liquidity risks associated with
auction rate securities that the respective financial institutions underwrote,
marketed and sold. Further, the respective regulatory authorities alleged the
respective financial institutions misrepresented to customers that auction rate
securities were safe, highly liquid investments that were comparable to money
markets. Certain settlement agreements were finalized prior to December 31,
2008. Approximately 97% (based on par value) of our auction rate security
investments were not covered by the terms of the above mentioned settlement
agreements. The focus of the initial settlements was generally towards
individuals, charities, and businesses with small investment balances, generally
with holdings of $25 million and less. As part of the general terms of the
18
settlements, the respective financial institutions have agreed to provide their
best efforts in providing liquidity to the auction rate securities market for
investors not specifically covered by the terms of the respective settlements.
Such liquidity solutions could be in the form of facilitating issuer
redemptions, resecuritizations, or other means. The Company can not currently
project when liquidity will be obtained from these investments and plans to
continue to hold such securities until the securities are called, redeemed, or
resecuritized by the debt issuers.
The remaining 3.0% (based on par value) was specifically covered by a settlement
agreement which the Company signed during the fourth quarter of 2008. By signing
the settlement agreement, the Company relinquished its rights to bring any
claims against the financial institution, as well, as its right to serve as a
class representative or receive benefits under any class action. Further, the
Company no longer has the sole discretion and right to sell or otherwise dispose
of, and/or enter orders in the auction process with respect to the underlying
securities. As part of the settlement, the Company obtained a put option to sell
the underlying securities to the financial institution, which is exercisable
during the period starting on June 30, 2010 through July 2, 2012, plus accrued
interest. Should the financial institution sell or otherwise dispose of our
securities the Company will receive the par value of the securities plus accrued
interest one business day after the transaction. Upon signing the settlement
agreement, the Company no longer maintains the intent and ability to hold the
underlying securities for recovery of the temporary decline in fair value. The
Company also acquired an asset, a put option that is valued as a stand alone
financial instrument separate from the underlying securities. There was not any
significant change in the value of the put option during the period ended June
30, 2009. The value of these securities is included in long-term investments per
the consolidated balance sheet.
The Company has evaluated the unrealized loss on securities other than
securities covered by the settlement agreement discussed above to determine
whether this decline is other than temporary. Management has concluded the
decline in fair value to be temporary based on the following considerations.
o Current market activity and the lack of severity or extended decline
do not warrant such action at this time.
o Since auction failures began in February 2008, the Company has
received approximately $28.8 million as the result of partial calls by
issuers. The Company received par value for the amount of these calls
plus accrued interest.
o Based on the Company's financial operating results, operating cash
flows and debt free balance sheet, the Company has the ability and
intent to hold such securities until recovery of the unrealized loss.
o There have not been any significant changes in collateralization and
ratings of the underlying securities since the first failed auction.
The Company continues to hold 95% of the auction rate security
portfolio in senior positions of AAA (or equivalent) rated securities.
o The Company is aware of recent increases in default rates of the
underlying student loans that are the assets to the trusts issuing the
auction rate security debt, which management believes is due to
current overall economic conditions. As the underlying loans are
guaranteed by the U.S. Government, defaults of the loans accelerate
payment of the underlying loan to the trust. As trusts are no longer
recycling repayment money for new loans, accelerated repayment of any
student loan to the underlying trust would increase cash flows of the
trust which would potentially result in partial calls by the
underlying trusts.
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 as well as improve overall
liquidity in the student loan auction rate market. This has the
potential to impact existing securities with underlying student loans.
o All of the auction rate securities are held with financial
institutions that have agreed in principle to settlement agreements
with various regulatory agencies to provide liquidity. Although the
principles of the respective settlement agreements focus mostly on
small investors (generally companies and individual investors with
auction rate security assets less than $25 million) the respective
settlements state the financial institutions will work with issuers
and other interested parties to use their best efforts to provide
liquidity solutions to companies not specifically covered by the
principle terms of the respective settlements by the end of 2009 in
19
certain settlement agreements. Regulatory agencies continue to monitor
the progress of the respective financial institutions towards this
goal.
Management will monitor its investments and ongoing market conditions in future
periods to assess impairments considered to be other than temporary. Should
estimated fair value continue to remain below cost or the fair value decrease
significantly from current fair value due to credit related issues, the Company
may be required to record an impairment of these investments through a charge in
the consolidated statement of income.
Net working capital for the six months ended June 30, 2009 decreased by $10.6
million over December 31, 2008 largely due to a decrease in cash and cash
equivalents driven by share repurchases, cash paid for equipment purchases, less
cash received from partial calls of ARS investments and increases in accounts
payable due to equipment purchases. Based on the Company's strong financial
position, management believes outside financing could be obtained, if necessary,
to fund capital expenditures.
Off-Balance Sheet Transactions
The Company's liquidity is not materially affected by off-balance sheet
transactions.
Risk Factors
You should refer to Item 1A of our annual report (Form 10-K) for the year ended
December 31, 2008, 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, any of which could have a materially
adverse effect on our operating results.
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 changes in regulations
could 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 or future
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 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 If the estimated fair value of auction rate securities continues to
remain below cost or if the fair value decreases significantly from
the current fair value, we may be required to record an impairment of
these investments, through a charge in the consolidated statement of
income, which could have a materially adverse effect on our earnings.
o Seasonality and the impact of weather 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.
20
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, 2009, ($160.4 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 $1.6
million.
The Company has no debt outstanding as of June 30, 2009 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, 2009 and
2008, fuel expense, net of fuel surcharge revenue and fuel stabilization paid to
owner operators along with favorable fuel hedge settlements, was $13.4 million
and $23.7 million or 15.2% and 22.2%, respectively, of the Company's total net
operating expenses, net of fuel surcharge. For the six months ended June 30,
2009 and 2008, fuel expense, net of fuel surcharge revenue and fuel
stabilization paid to owner operators along with favorable fuel hedge
settlements, was $27.0 million and $47.8 million or 15.5% and 22.7%,
respectively, of the Company's total net 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 projected future purchases of diesel fuel to reduce its exposure to
diesel fuel price fluctuations. During the quarter ended March 31, 2009, the
Company contracted with an unrelated third party to hedge forecasted future cash
flows related to fuel purchases for the quarter ended June 30, 2009. The hedge
of forecasted future cash flow was transacted through the use of certain swap
contracts. The Company has implemented the provisions of SFAS No. 133 and SFAS
No. 161, and has designated such hedges as cash flow hedges. The cash flow
hedging strategy was implemented mainly to reduce the Company's exposure to
significant upward movements in diesel fuel prices related to fuel consumed by
empty and out-of-route miles and truck engine idling time, which is not
recoverable through fuel surcharge agreements. The contracted hedge expired on
June 30, 2009 and favorably impacted fuel expense $0.6 million for the quarter
ended June 30, 2009. There were no open hedging contracts at June 30, 2009.
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 7, 2009. 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 (86,070,041 for, 0
against, 391,488 withheld,) and ratified the appointment of KPMG, LLP as
the Company's independent registered public accounting firm for the fiscal
year ending December 31, 2009 (86,223,975 for, 230,672 against, 6,882
withheld). Shareholders representing 86,461,529 shares, or approximately
95.3% 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.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of 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 17, 2009, announcing the
Company's financial results for the quarter ended March 31, 2008.
2. Report on Form 8-K, dated June 11, 2009, 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 7, 2009 BY: /S/ John P. Cosaert
-------------------
John P. Cosaert
Executive Vice President-Finance,
Chief Financial Officer and Treasurer
(Principal accounting and financial
officer)
23