Heartland Express, Inc. — Q3 2010 Form 10-Q
Business context and period. Heartland Express is a short-to-medium-haul truckload carrier. This unaudited filing covers the three and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $127.2 | $113.4 | $370.3 | $345.3 |
| Operating income | $29.1 | $22.4 | $66.9 | $63.2 |
| Net income | $18.3 | $14.5 | $46.8 | $46.3 |
| EPS | $0.20 | $0.16 | $0.52 | $0.51 |
| Operating ratio | 77.2% | 80.2% | 81.9% | 81.7% |
| Net margin | 14.4% | 12.8% | 12.6% | 13.4% |
- Q3 revenue rose 12.2% and net income rose 26.1%. Revenue growth reflected higher fuel surcharges, more fleet miles, improved line-haul revenue and lower deadhead miles. Management said freight rates stabilized during the quarter.
- Nine-month revenue rose 7.2%, while net income increased about 1.2%. Higher fuel costs and depreciation largely offset revenue growth; the nine-month operating ratio edged higher.
- Fuel expense increased 19.8% in Q3 and 21.2% year to date. Management cited higher diesel prices and miles, partly mitigated by newer, more fuel-efficient tractors and fuel-management initiatives. Fuel surcharge recovery does not offset all fuel-price increases.
- Cash from operations was $72.9, versus $71.6 in the first nine months of 2009. Cash and cash equivalents were $170.0 at September 30, up from $52.4 at year-end 2009.
Financial position, liquidity and capital allocation
- Cash, short-term investments and long-term investments totaled $287.6 at September 30, 2010. The company reported no debt.
- Total assets were $595.1; current assets were $264.5 and current liabilities $149.2. Current liabilities included $92.5 of dividends payable.
- Investing activities provided $48.3 in the first nine months, including $50.3 of investment maturities and calls and $15.6 of equipment-sale proceeds. Net cash purchases of property and equipment were a $0.4 inflow, reflecting trade and purchase timing—not an absence of planned investment.
- The board declared a $1.02-per-share dividend, including a $1.00 special dividend, or approximately $92.5 total. It was paid October 5, 2010. The company also paid $3.6 in regular cash dividends during the first nine months.
- Estimated net equipment purchase commitments, after guaranteed minimum trade values, were $46.5. Management expected to fund them with existing cash and operating cash flow.
Outlook, risks and unusual items
- No quantitative earnings or revenue guidance was provided. Management described improved industry freight volumes and utilization versus early 2010, with utilization relatively flat from Q2 to Q3 and freight rates stabilizing. Longer-term growth depends on economic demand, industry capacity, acquisitions and driver availability.
- Most investments were auction-rate student-loan bonds. All auctions remained unsuccessful; fair value was estimated using Level 3, unobservable inputs. The portfolio had a $3.1 unrealized loss recorded in accumulated other comprehensive loss, with no income-statement impairment recognized. Management said 99.3% of ARS holdings at par were government-backed and AAA-rated or equivalent; issuer calls received since the first failures totaled about $103.2, including $7.5 after quarter-end. Timing of further liquidity is uncertain, and management cautioned that estimated fair values may change materially.
- Management said a significant increase or shortage in diesel fuel, weaker freight demand or rates, customer concentration, driver recruitment and retention, regulation, claims, weather, and equipment costs could adversely affect results. The filing refers investors to the 2009 Form 10-K for fuller risk-factor detail.
- Gross unrecognized tax benefits were $17.9, with $9.0 of accrued interest and penalties. Management estimated a possible $1.7–$2.7 decrease in gross unrecognized benefits over the next 12 months, primarily from statute expirations; timing and ultimate resolution remain uncertain.
- Routine litigation and administrative proceedings, primarily transport-related injury, property-damage and workers’ compensation matters, were disclosed; management considered exposure adequately provided for. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- Equipment-sale gains supported reported operating results: gains were $8.0 in Q3 and $10.5 year to date, lower than the comparable 2009 amounts. The $92.5 special dividend was a material capital-allocation item, declared before quarter-end and paid after it.
Important facts for investors to verify
- Whether failed auction-rate security markets improve, and whether ARS fair values or liquidity assumptions change or trigger an impairment.
- Whether freight demand, rates, miles and fuel-surcharge recovery sustain operating performance as fuel prices and driver costs change.
- Timing and funding of the $46.5 equipment commitments, and the operating effects of fleet replacement and trailer age.
- Payment of the declared special dividend, remaining liquidity after payment, and any subsequent capital-return decisions.
- Resolution of uncertain state tax positions and developments in insurance, claims and routine litigation.