Heartland Express, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; the filing also reports fourth-quarter results. Heartland is a short-to-medium-haul truckload carrier focused on regional dry-van freight, primarily east of the Rocky Mountains.
Financial performance
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Operating revenue | $499.5 million | $459.5 million | +8.7% |
| Operating income | $91.4 million | $79.0 million | +15.8% |
| Net income | $62.2 million | $56.9 million | +9.2% |
| Earnings per share | $0.69 | $0.62 | Up $0.07 |
| Operating ratio | 81.7% | 82.8% | Improved 1.1 percentage points |
| Net margin | 12.5% | 12.4% | Improved 0.1 percentage point |
| Cash flow from operations | $98.6 million | $101.1 million | Down $2.5 million |
Revenue growth reflected higher freight volumes and rates, plus fuel surcharge revenue of $75.3 million versus $53.3 million. Line-haul revenue rose 4.4%, while average diesel prices increased 21.2%. Fuel cost net of fuel surcharges was 15.9% of operating expenses, roughly flat with 16.0% in 2009. Fuel expense itself increased 21.3% to $126.5 million. Lower insurance and claims costs helped results; depreciation rose 5.5%, and gains on equipment disposals declined to $13.3 million from $19.7 million.
Fourth quarter: Revenue was $129.2 million versus $114.2 million in Q4 2009; operating income was $24.5 million versus $15.8 million; net income was $15.4 million versus $10.7 million; and EPS was $0.17 versus $0.12.
Financial position and capital allocation
- Cash and cash equivalents were $121.1 million; cash, cash equivalents, and investments totaled $209.8 million at year-end, up $9.5 million from 2009. The company reported no long-term debt.
- Net working capital was $144.9 million. Total assets were $506.0 million and stockholders’ equity was $334.2 million.
- Investing activities provided $68.1 million, principally reflecting investment maturities and calls and equipment-sale proceeds. Net equipment purchases were $14.6 million, versus $79.1 million in 2009.
- FY 2010 dividends paid totaled $97.9 million, including a $90.7 million special dividend. Regular quarterly dividends continued; no shares were repurchased in 2010.
- Net equipment purchase commitments were estimated at $100.7 million, primarily for fleet upgrades and due within one year. Management expected to fund capital needs through operating cash flow and existing cash and investments.
Changes, outlook, and notable risks
- Freight demand and industry capacity improved during 2010 from recessionary 2009 levels. Management expected rate stabilization and some rate improvement to continue into 2011, while noting freight volumes remained below pre-recession levels. No specific revenue or earnings guidance was provided.
- Management cited fuel initiatives, newer equipment, and operating controls as supporting performance. Approximately 89.5% of tractors were 2009-or-newer models; the company expected about 95% of its fleet to have electronic on-board recorders by the end of Q1 2011.
- Customer concentration remains material: the 25 largest customers represented 73.1% of gross revenue, and one customer represented 12.6%. The five largest accounted for approximately 38%.
- Fuel surcharges do not fully offset rapid fuel-price increases or fuel consumed on empty miles and during idling. Driver recruitment and retention, competitive freight rates, equipment costs and resale values, weather, and self-insured claims are additional risks.
- Potential changes to federal hours-of-service rules and safety oversight could reduce productivity or raise costs. The company reported it did not exceed any FMCSA CSA performance thresholds based on the initial data available.
- Auction-rate securities remain a significant liquidity and valuation concern: $88.7 million fair value, against $91.8 million amortized cost, was held at year-end; auctions had failed, and the securities were classified as long-term except for announced calls. The $3.1 million unrealized loss was recorded in accumulated other comprehensive loss, not earnings. Management said it did not expect to need discounted sales; $8.3 million was called at par after year-end.
- Unrecognized tax benefits and related interest and penalties were disclosed as potential obligations; the contractual-obligations table lists $27.3 million, with settlement timing unclear. Routine litigation was reported, with management stating exposure was adequately provided for.
- Chairman and CEO Russell Gerdin was on a health-related leave of absence; President Michael Gerdin assumed his responsibilities. The filing warns that the chairman’s inability to return could affect the share price.
Most important facts to verify
- Whether 2011 freight demand, capacity tightening, and rate increases materialized as management expected.
- The liquidity, fair-value assumptions, issuer calls, and any impairment risk for auction-rate securities.
- Execution and funding of the $100.7 million fleet commitments, including equipment resale proceeds and costs.
- Developments in fuel costs, customer concentration, driver availability, and regulatory rules affecting productivity.
- Changes in self-insurance claims, tax contingencies, and the company’s ability to sustain dividends after the special 2010 payment.