Heartland Express, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with the three months ended March 31, 2011 unless noted. Heartland is a U.S. short-to-medium-haul truckload carrier operating as one reportable segment.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | $134.8 million | $127.7 million | Up 5.6% |
| Operating income | $23.8 million | $21.9 million | Up 8.7% |
| Net income | $16.6 million | $14.9 million | Up 11.5% |
| Diluted EPS | $0.19 | $0.16 | Up $0.03 |
| Operating ratio | 82.4% | 82.9% | Improved 0.5 percentage points |
| Net margin | 12.3% | 11.7% | Improved 0.6 percentage points |
| Operating cash flow | $28.4 million | $23.9 million | Up $4.4 million |
Revenue growth reflected a 15.9% increase in fuel surcharge revenue to $28.0 million and a 3.2% increase in line-haul and other revenue, attributed to more miles and higher freight rates per total mile. Fuel expense rose 9.1% to $42.7 million as diesel prices and miles increased; net fuel cost per mile after fuel surcharges decreased 3.7%. Depreciation rose 12.6% to $13.9 million. Equipment-sale gains were $4.2 million, versus $3.9 million in Q1 2011, reducing reported operating expenses.
Balance sheet and liquidity
- Cash and cash equivalents were $172.3 million at March 31, 2012, up from $139.8 million at December 31, 2011. Cash, cash equivalents, and investments totaled $222.9 million.
- The company reported no debt. Total assets were $550.7 million; stockholders’ equity was $356.5 million.
- Q1 investing cash flow was positive $4.2 million, including $8.2 million of equipment-sale proceeds and $4.0 million of equipment purchases. Net cash increased $32.5 million.
- Management estimated 2012 net revenue-equipment capital expenditures of $22–$25 million, principally for trailer purchases. Equipment purchase commitments, including received-but-unpaid equipment, totaled $21.9 million at quarter-end.
- The company declared quarterly dividends of $0.02 per share. It authorized repurchases of up to 5.0 million shares; none were repurchased in Q1. After quarter-end, it repurchased 8,265 shares for $0.1 million.
Material developments, outlook, and risks
- Management said freight demand improved through 2011 and into 2012 but remained below pre-recession levels. It cited ongoing difficulty recruiting and retaining qualified drivers and continued competition for drivers.
- Average diesel prices were 9.1% higher year over year, and management expected fuel prices to remain at or above then-current levels. Surcharges do not recover all fuel costs, particularly on empty and out-of-route miles. The board authorized fuel hedging in February 2012; the filing does not state that hedges had been entered into.
- All auction-rate student-loan securities had unsuccessful auctions. Their $50.5 million fair value was below $53.6 million amortized cost, with a $3.1 million unrealized loss in accumulated other comprehensive loss. Valuation relies on Level 3 estimates and liquidity timing is uncertain. Management considered the loss temporary and said it did not intend to sell at a discount. On May 2, 2012, the company sold $15.6 million of these securities at par plus accrued interest.
- Gross unrecognized tax benefits were $15.2 million at March 31, 2012, with $7.2 million of accrued interest and penalties. The company was under examinations by three state agencies, had received notice of an audit from a fourth state agency, and was under IRS examination for its 2009 federal return. Management estimated a possible $0.7–$1.7 million decrease in unrecognized tax benefits over the next 12 months, mainly from statutes of limitation.
- Other risks identified include dependence on major customers and freight rates, capital and equipment costs, driver availability, regulation, insurance claims, seasonality, and possible impairment of auction-rate securities. Routine litigation was disclosed; management said exposure was adequately provided for. Management reported adequate liquidity and effective disclosure controls. No earnings guidance was provided.
Key facts for investors to verify
- Whether revenue and margin improvement persists after accounting for fuel surcharge revenue, higher fuel costs, equipment-sale gains, and the effects of driver and freight-market conditions.
- How the company funds planned $22–$25 million net equipment capital expenditures while maintaining dividends and discretionary share repurchases.
- Progress in recovering or selling the remaining auction-rate securities, and any changes in their fair value, liquidity, or impairment assessment.
- Resolution and potential financial effects of state and federal tax examinations and unrecognized tax positions.
- Whether driver recruitment and retention, fuel prices, and equipment purchase commitments affect operating capacity and costs.