Heartland Express, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Heartland Express operates as a short-to-medium-haul truckload carrier. Financial amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $127.4 | $117.0 | $243.0 | $232.0 |
| Operating income | $22.0 | $21.7 | $37.9 | $40.7 |
| Net income | $16.7 | $17.6 | $28.5 | $31.8 |
| EPS | $0.18 | $0.19 | $0.31 | $0.35 |
| Operating ratio | 82.7% | 81.4% | 84.4% | 82.4% |
| Net margin | 13.1% | 15.1% | 11.7% | 13.7% |
- Q2 revenue rose 8.9%; management attributed the increase to $7.7 million more fuel-surcharge revenue and about $2.7 million more line-haul revenue. Six-month revenue rose 4.8%, as $12.9 million of additional surcharge revenue more than offset a $1.8 million decrease in line-haul revenue.
- Margins weakened despite revenue growth. Q2 operating income increased about 1.5%, but net income fell 5.5%; for the first half, operating income fell about 7.1% and net income fell about 10.1%.
- Fuel expense increased 23.6% in Q2 and 22.0% in the first half, reflecting higher fuel prices and, in Q2, more miles. Depreciation increased 16.9% and 24.5%, respectively, largely due to tractors added in late 2008 and 2009. Lower gains on equipment disposals also weighed on comparisons.
- Q2 fuel expense was $31.0 million; the company said its fuel cost per company-owned tractor mile rose 21.1%, below the 29.4% increase in the national average fuel price. It reported purchasing 4.2% fewer gallons in Q2 despite increased miles.
Cash, liquidity, and capital
- At June 30, cash and cash equivalents were $116.3 million, short-term investments $36.0 million, and long-term investments $102.9 million. Combined cash and investments were $255.2 million, up $54.8 million from year-end 2009. The company had no debt.
- First-half operating cash flow was $47.9 million, versus $45.3 million a year earlier; cash flow from operations equaled 19.7% of revenue, compared with 19.5%. Net investing cash provided was $17.8 million, and financing cash used was $1.8 million, primarily dividends. Cash increased $63.9 million to $116.3 million.
- Net property-and-equipment purchases were $0.2 million in the first half, versus $21.0 million in 2009; equipment-sale proceeds were $9.4 million. A net $53.4 million tractor purchase commitment was expected to be delivered in the second half of 2010. Management expected to fund purchases from cash and operating cash flow and stated liquidity was adequate for current and projected needs.
- The company declared a quarterly dividend of $0.02 per share, paid July 2, 2010. No shares were repurchased in the first half; 6.5 million shares remained under the repurchase authorization.
Outlook, risks, and notable items
- Management reported improving freight volumes and equipment utilization during Q2, with freight rates stabilizing, after soft demand through 2009 and Q1 2010. It cited customer demand, industry capacity, acquisition opportunities, and experienced-driver availability as factors affecting future growth. No numerical earnings or revenue guidance was provided.
- Fuel-price exposure remains material: management stated it cannot pass through all fuel increases. There were no open fuel hedges at June 30, 2010. The filing identifies fuel-price volatility, freight demand and rates, driver recruitment and retention, customer concentration, insurance claims, regulation, and seasonality among key risks.
- Auction-rate student-loan securities remained illiquid after failed auctions. Their June 30 fair value was estimated using Level 3 inputs; the portfolio included a $5.6 million unrealized loss recorded in other comprehensive loss, with no impairment recognized in earnings. Management said it did not intend, and was not likely required, to sell before recovery, but acknowledged further decline could require an impairment charge. Calls and a put exercise after quarter-end brought the remaining portfolio to approximately 99.4% U.S.-government-backed and AAA-rated holdings; when liquidity will be available remains uncertain.
- Gross unrecognized tax benefits were $17.6 million at June 30, with $8.8 million of related accrued interest and penalties. Management estimated a possible $1.8–$2.8 million decrease in unrecognized benefits over the next 12 months, mainly from statute expirations; no ongoing tax examinations or litigation were reported.
- Routine litigation and administrative proceedings were described as incidental to the business, with potential exposure considered adequately provided for. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether improving freight demand and utilization translate into stronger line-haul revenue and margins, given the higher operating ratio.
- Execution, timing, and funding of the $53.4 million net equipment commitment, and its effects on depreciation and cash.
- Liquidity, valuation assumptions, and any impairment indicators for the auction-rate securities portfolio.
- Fuel-price pass-through and cost-control performance, along with insurance and claims trends.
- Developments in state tax positions, customer concentration, driver availability, and the company’s stated industry and regulatory risks.