Heartland Express, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparison with the three months ended March 31, 2012. Heartland is a U.S. short-to-medium-haul regional dry-van truckload carrier. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Operating revenue | $134.3 million | $134.8 million | Down 0.4%; fuel surcharge revenue was $28.0 million in both periods. |
| Operating income | $30.2 million | $23.8 million | Up 27.0%. |
| Net income | $19.7 million | $16.6 million | Up 19.0%. |
| Basic and diluted EPS | $0.23 | $0.19 | Weighted-average basic shares fell to 84.8 million from 86.5 million. |
| Operating ratio | 77.5% | 82.4% | Improved; includes gains on equipment disposals. |
| Net margin | 14.7% | 12.3% | Improved. |
| Operating cash flow | $28.5 million | $28.4 million | Approximately 21% of revenue in both periods. |
| Cash and cash equivalents | $127.5 million | $119.8 million at Dec. 31, 2012 | Quarter-end cash increased $7.7 million. |
At March 31, 2013, total assets were $515.2 million, current assets $209.5 million, and current liabilities $71.6 million. The company reported no debt and $147.5 million of cash, cash equivalents, and investments. It paid no financing cash flows during the quarter and declared dividends of $0.02 per share.
Material changes and drivers
- Revenue declined slightly as loaded miles fell 3.3%; higher freight rates partly offset the volume decline. Fuel surcharge revenue was unchanged.
- Net income benefited materially from equipment-sale gains of $11.2 million, versus $4.2 million a year earlier. Management attributed the increase primarily to selling about 4.5 times as many tractors and receiving higher proceeds on trailer sales. The improved operating ratio therefore includes a substantial disposal-gain contribution.
- Fuel expense rose 0.6%; fuel cost per mile net of surcharges increased 3.9%. Higher fuel prices and winter-related idling were partly offset by fewer miles.
- Depreciation expense rose 8.1%, primarily due to fleet replacement and trailer purchases. Insurance and claims expense increased 13.8%, while salaries, wages, and benefits fell 3.3%.
- Investing cash flow was a $20.8 million use, compared with $4.2 million provided in Q1 2012, mainly reflecting increased equipment purchases. Purchases of property and equipment were $38.2 million and sale proceeds were $17.5 million.
Outlook, risks, and unusual items
- Management estimated 2013 net capital expenditures on revenue equipment of approximately $55–$60 million, primarily for the tractor fleet upgrade. It expected depreciation to trend higher in each 2013 quarter than in 2012, and equipment-sale gains to increase from 2012 levels. No specific revenue or earnings forecast was provided.
- Management said freight capacity and demand were broadly stable in Q1 and noted that the first quarter is historically the weakest freight-demand quarter. Freight-rate increases had not offset operating-cost increases. Driver recruitment and retention remained difficult.
- Management anticipated fuel prices would remain at or above then-current levels. Fuel surcharges do not recover all fuel costs, including costs from empty and out-of-route miles and idling. The company also faces tire-price risk and does not currently use derivatives for risk management.
- All $20.0 million of long-term investments at fair value were auction-rate student-loan securities with failed auctions and limited liquidity; amortized cost was $21.3 million. A $1.3 million unrealized loss remained in accumulated other comprehensive loss, with no impairment charge recorded. Management said it intended to hold the securities and did not expect to need discounted sales, but fair value relies on Level 3 estimates and may vary. A future impairment could reduce earnings.
- Gross unrecognized tax benefits were $15.1 million at quarter-end, with $7.0 million of related accrued interest and penalties. Management estimated a possible $0.2–$1.2 million decrease in unrecognized benefits over the next 12 months, mainly from statute expirations; timing and ultimate outcomes remain uncertain.
- The company disclosed routine litigation and administrative proceedings, with management stating that potential exposure was adequately provided for. Equipment purchase commitments, including equipment received but unpaid and net of estimated tractor sale commitments, totaled $19.3 million. No subsequent event requiring disclosure was reported.
- Other key risks identified include economic and customer demand conditions, customer concentration, equipment costs and availability, regulatory and environmental requirements, insurance claims, seasonality and weather, and continued driver availability.
Important facts for investors to verify
- How much of the earnings and operating-ratio improvement came from equipment-sale gains, and whether those gains are sustainable.
- Whether loaded-mile trends, freight rates, and driver recruiting improve enough to support revenue growth and service levels.
- Actual 2013 equipment spending and whether fleet replacement leads to higher depreciation or different-than-expected used-equipment proceeds.
- The liquidity, valuation assumptions, and potential impairment exposure of the failed-auction securities.
- Developments in uncertain tax positions, insurance and litigation claims, and the company’s ability to manage fuel and other cost inflation.