Business context and reporting period
Heartland Express, Inc. filed this Form 10-K for the fiscal year ended December 31, 2011. The company is a short-to-medium-haul truckload carrier providing regional dry-van services, primarily east of the Rocky Mountains. It reports one operating segment.
Unless otherwise indicated, financial amounts below are in U.S. dollars. The filing also provides unaudited fourth-quarter results.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Operating revenue | $528.6 million | $499.5 million |
| Operating income | $106.6 million | $91.4 million |
| Net income | $69.9 million | $62.2 million |
| Diluted EPS | $0.78 | $0.69 |
| Operating ratio | 79.8% | 81.7% |
| Net margin | 13.2% | 12.5% |
| Cash from operations | $99.1 million | $98.6 million |
Revenue rose 5.8%; management attributed the increase mainly to fuel surcharge revenue, which increased $32.5 million to $107.8 million. Line-haul and other revenue declined $3.4 million, reflecting fewer total miles, partly offset by higher freight rates per total mile. The 28.4% rise in average diesel prices contributed to the higher surcharges.
Fourth-quarter 2011 revenue was $131.2 million, operating income $26.9 million, net income $17.1 million, and basic EPS $0.20, compared with $129.2 million, $24.5 million, $15.4 million, and $0.17, respectively, in fourth-quarter 2010.
At year-end, cash and cash equivalents were $139.8 million, long-term investments were $50.6 million, and working capital was $167.8 million. The company had no debt. Cash, cash equivalents, and investments totaled $190.3 million. Cash flow from investing activities was a $16.9 million outflow; financing activities used $63.5 million, including $56.4 million of share repurchases and $7.1 million of dividends.
Material changes versus the prior comparable period
- Profitability improved: operating income increased 16.5% and net income increased 12.4%. The operating ratio improved by 1.9 percentage points.
- Fuel expense increased 28.0% to $161.9 million, principally because of higher fuel prices. Net fuel cost per mile after surcharges increased about 7%.
- Gains on equipment disposals rose to $32.1 million from $13.3 million, supported by stronger used-equipment pricing and higher volumes of tractors and trailers sold. This was a significant contributor to the improved operating results.
- Operating cash flow was broadly stable year over year. Cash used in investing activities shifted from $68.1 million provided in 2010 to $16.9 million used in 2011, reflecting higher equipment purchases net of sales and fewer auction-rate security calls.
- The company repurchased 4.2 million shares for $56.4 million in 2011; it made no repurchases in 2010. Regular dividends were $0.08 per share in 2011, versus $1.08 in 2010, which included a special dividend.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance is provided. Management reported improving freight demand and a tighter capacity environment, but said volumes remained below pre-recession levels. Rate conditions improved, though increases had lagged rising equipment costs.
- Management anticipated fuel prices would remain at or above then-current levels. Fuel surcharges do not fully recover fuel costs on empty and out-of-route miles or during idling.
- Driver recruitment and retention remained challenging. The company cited competition for qualified drivers and potential productivity and cost effects from new hours-of-service rules effective in 2013.
- Management projected 2012 net capital expenditures for revenue equipment of approximately $25–$30 million. A subsequent trailer-purchase commitment was estimated at $21 million, with deliveries expected during 2012; proceeds from trailer sales were not guaranteed.
- All remaining auction-rate securities were subject to unsuccessful auctions and classified as long-term investments. Their $50.6 million fair value was below $53.7 million amortized cost, with a $3.1 million unrealized loss recorded in accumulated other comprehensive loss. The securities were government-backed and continued to pay interest, but the company could not predict when liquidity would be available.
- Unrecognized tax benefits totaled $16.1 million, with $8.0 million of accrued interest and penalties. The company disclosed state tax examinations and an IRS examination of its 2009 federal return. Settlement timing was uncertain.
- Ordinary-course claims and litigation include personal injury, property damage, cargo, and workers’ compensation matters. The company self-insures specified exposures, including auto liability up to $2.0 million per occurrence and workers’ compensation up to $1.0 million per occurrence.
- Cash income taxes paid were $24.2 million in 2011, down from $40.5 million in 2010, partly due to 100% bonus depreciation for tax purposes. Management expected cash tax payments to be significantly higher in 2012.
Most important facts for investors to verify
- How much of the revenue and profit improvement is sustainable apart from fuel surcharges and the unusually large equipment-disposal gains?
- Whether freight rates, loaded miles, and fleet utilization can offset fuel, tire, equipment, and driver-cost inflation.
- The timing and realizable value of the illiquid auction-rate securities, and whether any impairment becomes necessary.
- The outcome and potential financial effects of tax examinations and the company’s unrecognized tax positions.
- Actual 2012 equipment spending, trailer-sale proceeds, and the effect of capital returns on liquidity.
- Whether driver availability and hours-of-service changes affect capacity, productivity, safety, or customer service.