Business context and reporting period
Heartland Express, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. The company is a short-to-medium-haul truckload carrier, historically focused on dry van freight; its November 11, 2013 acquisition of Gordon Trucking, Inc. (GTI) expanded services into temperature-controlled transport, dedicated trucking, and brokerage. GTI’s results are included only from the acquisition date, so reported 2013 growth is not directly comparable with a full year.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenue | $582.3 million | $545.7 million |
| Operating income | $112.3 million | $94.9 million |
| Net income | $70.6 million | $61.5 million |
| Diluted earnings per share | $0.83 | $0.71 |
| Operating ratio | 80.7% | 82.6% |
| Net margin | 12.1% | 11.3% |
| Cash from operations | $111.2 million | $102.2 million |
| Cash and cash equivalents, year-end | $17.8 million | $119.8 million |
| Long-term debt, year-end | $75.0 million | None |
| Working capital, year-end | $55.7 million | $146.1 million |
Revenue rose 6.7% and net income 14.7%. Operating cash flow equaled 19.1% of revenue. Investing activities used $133.5 million, including $110.9 million of net cash for the GTI acquisition and $42.9 million of net revenue-equipment purchases. Financing activities used $79.8 million; the company ended the year with $17.8 million cash and $169.5 million of available borrowing capacity. The credit facility’s total commitment was $250 million and matures in 2018; the company reported compliance with its covenants.
Fourth-quarter 2013 revenue was $183.3 million, operating income $26.7 million, and net income $15.8 million, versus $136.2 million, $24.7 million, and $14.3 million, respectively, in fourth-quarter 2012. The 2013 quarter includes GTI results from November 11 onward.
Material changes versus the prior comparable period
- GTI was acquired for stated total consideration of $285 million, including cash, Heartland shares, and assumed debt; the purchase-price allocation also records a potential earn-out liability. Up to a further $20 million may be payable based on performance through 2017. GTI contributed approximately $56 million of 2013 revenue.
- Improved operating ratio and earnings reflected higher revenue and gains on equipment disposals, among other factors. Gains on disposal rose to $33.3 million from $15.1 million.
- Effective July 1, Heartland changed tractor depreciation from the 150% to the 125% declining-balance method. This reduced 2013 depreciation expense and increased operating income by $4.4 million, or about $0.03 per share after tax.
- The acquisition introduced debt, operating leases, and greater balance-sheet scale. Total assets increased to $724.8 million from $467.7 million; goodwill rose to $98.7 million.
- Heartland paid regular dividends of $0.08 per share in 2013; 2012 dividends included a $1.00-per-share special dividend. No open-market repurchases occurred in 2013.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance is provided. Management said freight demand was increasing while industry capacity was declining in late 2013 and early 2014, but stated that it could not predict whether the trend would continue. Management expects 2014 net capital expenditures of approximately $70–$80 million and anticipated lower tractor-sale activity than in 2013.
- Management identified integration of GTI, realizing expected synergies, and retaining qualified drivers as important uncertainties. The new hours-of-service rules effective in July 2013 negatively affected efficiency; driver competition and regulation may constrain capacity and raise costs.
- Fuel, equipment, maintenance, insurance and claims costs, customer concentration, economic and freight-rate conditions, and used-equipment values remain key risks. Fuel surcharges do not recover all fuel costs, particularly for empty, out-of-route, and idling miles.
- Self-insurance and claims reserves involve estimation risk. Routine litigation is described as incidental to operations; management believes pending exposure is adequately provided for. The filing reports $20.1 million of obligations for unrecognized tax benefits, including interest and penalties, with settlement timing uncertain.
- GTI’s internal controls were excluded from the year-end internal-control assessment; GTI represented 49% of consolidated assets and 10% of 2013 revenue. Management and the auditor concluded controls were effective for the portion assessed. KPMG issued an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Assess how much of reported growth and margin improvement came from the limited post-acquisition GTI contribution, equipment-sale gains, and the depreciation-method change; compare with the filing’s unaudited pro forma results.
- Track GTI integration, customer and driver retention, and whether anticipated acquisition synergies are achieved; the filing does not provide separate ongoing GTI financial results.
- Monitor debt repayment, liquidity, covenant headroom, and the substantial 2014 equipment commitments and planned capital expenditures.
- Review changes in driver availability and productivity under hours-of-service rules, as well as fuel recovery, equipment costs, and used-truck resale values.
- Follow development of self-insurance claims and state tax uncertainties, and note that GTI was excluded from the internal-control assessment.