Heartland Express, Inc. — Q3 2013 Form 10-Q
Business and period: Regional short-to-medium-haul truckload carrier. This unaudited filing covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. The company reports one operating segment.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $130.6 million | $135.0 million | $398.9 million | $409.6 million |
| Operating income | $26.0 million | $19.7 million | $85.6 million | $70.2 million |
| Net income | $15.9 million | $12.4 million | $54.7 million | $47.2 million |
| Diluted EPS | $0.19 | $0.14 | $0.64 | $0.55 |
| Operating ratio | 80.1% | 85.4% | 78.5% | 82.9% |
| Net margin | 12.1% | 9.2% | 13.7% | 11.5% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $73.2 million | $67.5 million |
- Quarterly revenue fell 3.2%, largely because loaded miles declined 5.1%; higher freight rates partly offset the lower volume. Nine-month revenue decreased 2.6%, with loaded miles down 4.4%.
- Nine-month operating expenses were 78.5% of revenue versus 82.9% a year earlier. Lower fuel, maintenance, and insurance costs and higher equipment-disposal gains contributed to improved results.
- Nine-month cash from operations was 18.3% of revenue, compared with 16.5% in 2012. Investing activities used $25.4 million, including $91.8 million in equipment purchases and $56.8 million in equipment-sale proceeds. Financing activities used $3.4 million, principally for dividends.
- At September 30, cash and cash equivalents were $164.2 million; short-term investments were $6.9 million and long-term investments $4.3 million. Management reported $175.4 million in cash, cash equivalents, and investments and a debt-free balance sheet. Total assets were $537.5 million; current liabilities were $66.5 million.
- Quarterly and nine-month dividends declared were $0.02 and $0.06 per share, respectively. No shares were repurchased in the first nine months of 2013.
Material changes and unusual items
- Effective July 1, 2013, the company changed tractor depreciation from the 150% to the 125% declining-balance method. This reduced depreciation expense and increased operating income by approximately $2.1 million in both the quarter and nine-month period. Management expects lower depreciation and lower gains per tractor in future periods, assuming a relatively young fleet.
- Gains on property and equipment disposals rose to $24.3 million for the first nine months, from $9.4 million in 2012, primarily reflecting substantially more tractor sales. Management anticipated continued equipment-sale gains through the fleet upgrade period, but noted gains per tractor are expected to be lower under the revised depreciation estimate.
- The company generated $44.4 million of cash in excess of the beginning cash balance during the first nine months. Net equipment purchases were approximately $35.1 million.
- Quarterly effective tax rate was 39.3%, versus 37.4%; the nine-month rate was 36.3%, versus 33.2%. The company cited tax-position adjustments and fewer favorable tax adjustments.
Outlook, risks, and contingencies
- Management forecast net capital expenditures on revenue equipment of approximately $50–$55 million for 2013 and a further $35–$40 million in Q1 2014 as the tractor fleet upgrade continued. Estimated tractor purchase commitments, net of estimated sale commitments, were $56.3 million at September 30.
- Management said industry capacity and freight demand had not changed significantly in the first nine months. Modest rate increases had not kept pace with operating-cost increases. Driver recruitment and retention remained difficult, and new hours-of-service rules took effect July 1, 2013.
- Fuel prices, driver availability, customer concentration and freight demand, equipment costs and resale values, regulation, weather, and insurance claims are identified risks. Fuel surcharges do not recover all fuel costs, including costs from empty miles, out-of-route miles, and idling. Management expected fuel prices to remain at or above then-current levels.
- All auction-rate student-loan securities remained associated with unsuccessful auctions. Their par value was $11.4 million, with $11.2 million fair value; $6.9 million of calls at par were received after quarter-end. Remaining securities have long contractual maturities, and the company said timing of liquidity could not be projected. A forced sale or deterioration in value could result in an impairment charge.
- Gross unrecognized tax benefits were $13.2 million, with $6.5 million of accrued interest and penalties. Management estimated a possible $0.5–$1.5 million decrease in gross unrecognized benefits over the following 12 months, mainly from statute expirations. Routine freight-related litigation is ongoing; the company maintains insurance above self-insured retentions.
- Management stated liquidity was adequate for foreseeable needs. The filing provides no earnings or revenue guidance.
Key facts for investors to verify
- How much of improved earnings reflects recurring operations versus equipment-disposal gains and the $2.1 million depreciation-estimate change.
- Whether freight rates, loaded miles, and driver availability improve enough to offset cost pressures and new operating constraints.
- Actual 2013 and Q1 2014 equipment spending, tractor-sale proceeds, and the resulting fleet age and resale gains.
- Liquidity and fair-value developments for remaining auction-rate securities, including completion of the announced post-quarter calls.
- Developments in uncertain state tax positions, insurance claims, and other routine litigation.