Heartland Express, Inc. — Q2 2011 Form 10-Q
Business and period: Short-to-medium-haul truckload carrier; quarter and six months ended June 30, 2011. The company reports one operating segment. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $137.2 | $127.4 | $264.9 | $243.0 |
| Operating income | $32.7 | $22.0 | $54.6 | $37.9 |
| Net income | $22.5 | $16.7 | $37.4 | $28.5 |
| Diluted/basic EPS | $0.25 | $0.18 | $0.41 | $0.31 |
| Operating ratio | 76.2% | 82.7% | 79.4% | 84.4% |
| Net margin | 16.4% | 13.1% | 14.1% | 11.7% |
| Operating cash flow | — | $41.8 | $47.9 |
Q2 revenue rose 7.7% and six-month revenue rose 9.0%. Net income increased 35.3% in Q2 and 31.1% for the half. Reported revenue growth was substantially driven by higher fuel surcharge revenue: up 50.4% in Q2 and 48.7% for the half. Management said Q2 line-haul and other revenue was relatively unchanged; six-month line-haul and other revenue increased 2.0%.
Liquidity, cash flow, and balance sheet
- Cash and cash equivalents were $151.4 at June 30, up from $121.1 at year-end. Cash, cash equivalents, and investments totaled $218.5.
- The company had no debt. Current assets were $240.1 and current liabilities were $56.9.
- Six-month operating cash flow was $41.8, down from $47.9. Investing activities used $9.7, chiefly reflecting fleet purchases net of equipment-sale proceeds and investment calls; financing activities used $1.8 for dividends.
- Net property and equipment was $236.8, compared with $220.5 at December 31, 2010. Six-month purchases of property and equipment, net of trades, were $60.7; proceeds from equipment sales were $30.9.
- Quarterly dividend declared was $0.02 per share; six-month dividends declared were $0.04 per share. No shares were repurchased.
Material changes and unusual items
- Equipment-disposal gains increased to $11.7 in Q2 from $2.0 and to $15.5 for the half from $2.5. Management attributed this to favorable used-equipment pricing and materially higher equipment sales; these gains significantly supported operating income.
- Fuel expense increased 36.4% in Q2 and 34.5% for the half, reflecting higher diesel prices. Fuel cost per mile, net of surcharges, rose 12.5% in Q2 and 11.4% for the half.
- Insurance and claims expense declined 27.0% in Q2 and 22.9% for the half, reflecting lower frequency and severity of larger claims and favorable loss development. Depreciation also declined, primarily due to the age and depreciation pattern of the tractor fleet.
- Operating and maintenance expense rose 48.5% for both the quarter and six-month period, including fleet preparation for sale or trade, trailer updates, and increased repairs.
- ARS investments had a $3.1 unrealized loss recorded in accumulated other comprehensive loss; no other-than-temporary impairment was recognized. All auctions remained unsuccessful, and fair value relied on Level 3 estimates. The company reported no interest-payment defaults and said issuer calls had been at par plus accrued interest.
Outlook, risks, and contingencies
- Management expected freight-rate improvements to continue through the remainder of 2011, citing tighter industry capacity and higher freight demand. It also said recruiting and retaining qualified drivers had become more difficult.
- The fleet upgrade program was expected to continue through year-end 2011. Estimated net purchase commitments for tractors and trailers were $54.1 at June 30; trailer sales were expected to help fund purchases, but there were no guaranteed third-party commitments to buy trailers.
- Management said existing cash, investments, and operating cash flows were adequate for projected needs. No earnings or revenue guidance was provided.
- Key risks include fuel prices and incomplete surcharge recovery, driver availability, economic and freight demand conditions, customer concentration, equipment costs and resale values, regulation including CSA, insurance claims, and potential ARS impairment or liquidity constraints.
- Gross unrecognized tax benefits were $15.4, including $7.6 of accrued interest and penalties. The filing noted two state examination notices and estimated a possible $0.7–$1.7 decrease in gross unrecognized tax benefits over the next 12 months, mainly from statute expirations.
- Routine litigation and administrative proceedings were described as incidental to the business, with exposure considered adequately provided for. The 2011 Restricted Stock Award Plan was ratified in July, authorizing up to 906,886 shares; no grants had been made by the filing date.
Important facts for investors to verify
- How much of earnings growth is sustainable without the unusually large equipment-disposal gains, and whether used-equipment pricing remains favorable.
- Whether freight-rate gains and surcharge recovery can keep pace with fuel costs, and whether driver recruiting constraints affect capacity and service.
- The recoverability and liquidity of the ARS portfolio, including Level 3 valuation assumptions and any subsequent issuer calls or credit changes.
- Actual fleet-upgrade spending and trailer-sale proceeds relative to the $54.1 estimated net commitments.
- Developments in state tax examinations and the company’s unrecognized tax positions.