Heartland Express, Inc. — Q3 2011 Form 10-Q
Business and reporting period: Regional short-to-medium-haul dry-van truckload carrier. This unaudited filing covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless otherwise noted.
Financial performance and position
| Metric | Q3 2011 | Nine months 2011 |
|---|---|---|
| Operating revenue | $132.5 million; +4.2% | $397.4 million; +7.3% |
| Operating income | $25.1 million; −13.5% | $79.7 million; +19.1% |
| Net income | $15.4 million; −15.8% | $52.8 million; +12.8% |
| EPS | $0.17 vs. $0.20 | $0.58 vs. $0.52 |
| Operating ratio | 81.0% vs. 77.2% | 79.9% vs. 81.9% |
| Net margin | 11.6% vs. 14.4% | 13.3% vs. 12.6% |
| Operating cash flow | — | $71.9 million vs. $72.9 million |
- Q3 revenue growth was largely fuel-surcharge driven: surcharge revenue rose 46.2% to $27.5 million, while line-haul revenue declined $3.3 million amid fewer miles, partly offset by higher freight rates. For the nine months, fuel-surcharge revenue increased 47.9% to $81.3 million.
- Fuel expense rose 29.3% in Q3 and 32.7% year to date; management said net fuel cost per mile increased 8.4% and 10.1%, respectively, as surcharges did not recover all fuel-price increases. Higher insurance and claims also weighed on Q3 results.
- Year-to-date improvement reflected stronger equipment-disposal gains ($22.3 million versus $10.5 million) and lower depreciation, partly offset by higher fuel and maintenance costs. Gains on disposal were $6.8 million in Q3 versus $8.0 million.
- Cash and cash equivalents were $141.1 million; short- and long-term investments totaled $64.5 million at fair value. The company reported $205.6 million of cash, cash equivalents and investments and no debt. Current assets were $232.4 million and current liabilities $57.5 million.
- Year-to-date investing cash use was $19.4 million, including $91.3 million of property and equipment purchases, offset in part by $49.4 million of equipment-sale proceeds and $24.2 million of investment calls. Financing cash use was $32.5 million, including $28.9 million of share repurchases and $3.6 million of dividends. Cash increased $20.0 million during the period.
- Property and equipment purchases were part of a fleet-renewal program. The company reported approximately $17.0 million of estimated net equipment purchase commitments at quarter-end and expected about $17.0 million of further net revenue-equipment capital expenditures for the remainder of 2011.
Material changes and management commentary
- Freight demand and industry capacity had improved versus the recession, supporting rate stabilization and improvement, but management said freight volumes remained below pre-recession levels. Recruiting and retaining qualified drivers remained difficult.
- The company repurchased 2.2 million shares for approximately $29.6 million during the first nine months. An additional 1.2 million shares were repurchased for $16.4 million after quarter-end. About 4.3 million shares remained authorized for repurchase at September 30.
- The quarterly dividend was $0.02 per share; dividends declared for the first nine months totaled $0.06 per share, compared with $1.06 in the prior-year period.
- Management expected to fund ongoing capital needs with operating cash flow and existing cash and investments, and stated that liquidity was adequate. No earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Auction-rate securities: All auctions for the company’s student-loan bonds had failed. Their fair value was $64.5 million against $67.6 million amortized cost, with a $3.1 million unrealized loss recorded in accumulated other comprehensive loss. The securities were valued using Level 3 assumptions; management said fair value could change significantly and the timing of liquidity was uncertain. The bonds were AAA-rated or equivalent and backed by the U.S. government; management reported no missed interest payments and no intent to sell below par. Further credit deterioration or a decline in value could require an income-statement impairment.
- Operating risks: Fuel-price increases may not be fully passed through to customers. Driver availability, freight demand and rates, equipment costs and resale values, safety and regulatory requirements (including CSA), and insurance claims could affect results.
- Claims and tax matters: Routine transportation-related litigation was described as adequately provided for. Gross unrecognized tax benefits were $15.7 million; the company was under examination by two state agencies and had been notified of an intended IRS examination of its 2009 return. Management estimated a possible $0.3–$1.3 million decrease in gross unrecognized tax benefits over the next 12 months, mainly from statute expirations.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether freight volumes, line-haul revenue and rates improve, and whether driver recruitment limits capacity.
- Whether fuel surcharges keep pace with fuel costs and whether elevated insurance claims persist.
- The liquidity, valuation assumptions and potential impairment exposure of the auction-rate securities.
- Actual fleet capital spending, equipment-sale proceeds and resale values compared with stated plans and commitments.
- Post-quarter share repurchases, remaining repurchase authorization, and the sustainability of dividends and cash generation.
- Developments in state and federal tax examinations and unrecognized tax benefits.