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HTLD > SEC Filings for HTLD > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for HEARTLAND EXPRESS INC

Form 10-Q for HEARTLAND EXPRESS INC


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Item 2 contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are subject to the safe harbor created by such sections. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Such statements may be identified by their use of terms or phrases such as "expects," "estimates," "projects," "believes," "anticipates," "intends," "may" "could, " and similar terms and phrases. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1A. Risk Factors," set forth in the Company's Annual Report on Form 10-K, which is by this reference incorporated herein. Readers should review and consider the factors discussed in "Risk Factors" of the Company's Annual Report on Form 10-K, along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

All such forward-looking statements speak only as of the date of this Quarterly Report. You are cautioned not to place undue reliance on such forward-looking statements. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

Overview

Heartland Express, Inc. is a short-to-medium haul truckload carrier with corporate headquarters in North Liberty, Iowa. The Company provides regional dry van truckload services through its regional terminals and its corporate headquarters. The Company transports freight for major shippers and generally earns revenue based on the number of miles per load delivered. The Company's eleven regional operating divisions, not including operations at the corporate headquarters, accounted for 73.9% and 73.2% of the operating revenues for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, the Company's eleven regional operating divisions, not including operations at the corporate headquarters, accounted for 74.1% and 72.7% of the operating revenues, respectively. The Company takes pride in the quality of the service that it provides to its customers. The Company believes the keys to maintaining a high level of service are the availability of late-model equipment and experienced drivers.

Operating efficiencies and cost controls are achieved through equipment utilization, operating a fleet of late model equipment, maintaining an industry leading driver to non-driver employee ratio, and the effective management of fixed and variable operating costs. The demand for freight services generally increased throughout 2011 and into 2012 although current freight volumes are still below volumes experienced prior to the recent recession and third quarter 2012 volumes were softer than historical third quarter volumes. The Company and industry continues to experience increasing difficulties attracting and retaining qualified drivers. The Company believes increased competition for drivers is the result of a general balance of supply and demand of freight services and available equipment coupled with less drivers entering and staying in the industry. Specific to the Company's operations, Heartland only hires drivers with a minimum of one year over-the-road driving experience and therefore does not hire drivers that have recently entered the industry. Further, competition for drivers has escalated in part by increased industry and driver awareness of Compliance Safety Accountability ("CSA") scores.

The Company hires only experienced drivers (minimum 1 year of driving experience) with safe driving records. In order to attract and retain experienced drivers who understand the importance of customer service, the Company has sought to solidify its position as an industry leader in driver compensation in the Company's operating markets. The Company offers the top or near the top compensation pay per mile to drivers in the markets in which the Company operates. Comparing the nine month periods ended September 30, 2012 and 2011 our driver base remained flat.

Fuel prices have and will continue to challenge the industry. Fuel expense has historically been the second highest cost to the Company behind salaries, wages, and benefits. For the nine months ended September 30, 2012 fuel expense was greater than salaries, wages, and benefits at 30.8% of operating revenues compared to salaries, wages and benefits being 30.7%. During 2008 when fuel prices peeked, fuel expense was 32.7% of the Company's operating revenues. During the period 2009-2011, fuel expense


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averaged 26.2% of operating revenues. Although the Company maintains fuel surcharge agreements with customers, the Company is not able to pass through all fuel price increases through fuel surcharge agreements with customers due to empty and out-of-route miles. Further, quarterly results may be positively impacted in a period of declining fuel prices (rates of fuel surcharge billings due to a lag in billings based on fuel indexes compared to the current real time prices paid by the Company for fuel daily) commonly referred to as fuel surcharge lag, or negatively impacted in a period of rising fuel prices. The Company continues to focus on fuel surcharge pricing, truck idling hours, late model tractors with increased fuel economy, newer trailers with skirting and fuel purchasing decisions in an effort to lessen the impact of higher fuel costs. Average Department of Energy (DOE) diesel fuel prices increased 3.0% to $3.96 for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 average of $3.84. Although fuel prices increased 3.0% for the nine months ended September 30, 2012, the Company's net fuel cost per mile (fuel expense less fuel surcharge revenue not passed on to owner operators over company driver miles) decreased 0.5% compared to the same period of 2011.

At September 30, 2012, 100% of the Company's tractor fleet is equipped with idle management controls. At September 30, 2012, the Company's tractor fleet had an average age of 2.4 years compared to an average age of 1.8 at September 30, 2011. During the fourth quarter of 2012 the Company will begin certain upgrades to tractor equipment which will continue into 2013. The Company will continue to upgrade its trailer fleet during the remainder of 2012 taking advantage of a strong used trailer market. At September 30, 2012, the Company's trailer fleet had an average age of 3.3 years compared to 4.18 as of September 30, 2011 and is expected to improve throughout the last quarter of 2012 into 2013 based on the Company's commitment to replace certain older trailers with new trailers throughout the remainder of 2012 and into 2013.

The Company ended the first nine months 2012 with operating revenues of $409.6 million, including fuel surcharges, net income of $47.2 million, and basic earnings per share of $0.55 on basic weighted average outstanding shares of 86.2 million compared to operating revenues of $397.4 million, including fuel surcharges, net income of $52.8 million, and basic earnings per share of $0.58 on basic weighted average shares of 90.5 million in the first nine months of 2011. The Company posted an 82.9% operating ratio (operating expenses as a percentage of operating revenues) for the nine months ended September 30, 2012 compared to 79.9% for the same period of 2011 and an 11.5% net margin (net income as a percentage of operating revenues) for the nine months ended September 30, 2012 compared to 13.3% in same period of 2011. The nine month period ended September 30, 2011 included $12.9 million more in gains on disposal of property and equipment due to a higher volume of revenue equipment activity compared to the same period of 2012. The Company had total assets of $546.3 million at September 30, 2012. The Company achieved a return on assets of 11.8% and a return on equity of 17.9% over the immediate past four quarters ended September 30, 2012.

The Company's cash flow from operations for the nine months ended September 30, 2012 of $67.5 million was 16.5% of operating revenues compared to $71.9 million and 18.1% in the first nine months of 2011. The Company received $23.4 million in net investing cash flows, mainly due to $31.3 million in ARS calls, at par, received during the nine months ended September 30, 2012. The Company spent $17.9 million on dividends and stock buybacks during the nine months ended September 30, 2012. As a result, the Company increased cash and cash equivalents $73.0 million during the nine months ended September 30, 2012. The Company ended the first nine months of 2012 with cash, cash equivalents, and investments of $233.8 million, a debt-free balance sheet, and a trailing twelve months return on equity of 17.9%.


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Results of Operations

The following table sets forth the percentage relationships of expense items to
total operating revenue for the periods indicated:

                                               Three Months Ended September 30,        Nine Months Ended September 30,
                                                   2012                 2011               2012                 2011
Operating revenue                                  100.0  %              100.0  %          100.0  %              100.0  %
Operating expenses:
Salaries, wages, and benefits                       30.3  %               30.9  %           30.7  %               31.4  %
Rent and purchased transportation                    1.1                   1.4               1.2                   1.5
Fuel                                                31.4                  30.9              30.8                  30.8
Operations and maintenance                           4.8                   4.0               4.5                   4.2
Operating taxes and license                          1.6                   1.8               1.6                   1.7
Insurance and claims                                 3.6                   3.0               2.8                   2.6
Communications and utilities                         0.6                   0.6               0.5                   0.5
Depreciation                                        10.6                  11.2              10.3                  10.3
Other operating expenses                             2.8                   2.5               2.8                   2.5
Gain on disposal of property and equipment          (1.2 )                (5.1 )            (2.3 )                (5.6 )
                                                    85.4  %               81.0  %           82.9  %               79.9  %
Operating income                                    14.6  %               19.0  %           17.1  %               20.1  %
Interest income                                      0.1                   0.1               0.1                   0.2
Income before income taxes                          14.7  %               19.1  %           17.3  %               20.2  %
Income taxes                                         5.5                   7.5               5.7                   6.9
Net income                                           9.2  %               11.6  %           11.5  %               13.3  %

Three Months Ended September 30, 2012 Compared With the Three Months Ended September 30, 2011

Operating revenue increased $2.5 million (1.9%), to $135.0 million for the three months ended September 30, 2012 from $132.5 million for the three months ended September 30, 2011. The increase in revenue was mainly the result of a $2.8 million (2.6%) increase in line haul and other revenues offset by a decrease in fuel surcharge revenue of $0.3 million (1.0%) from $27.4 million to $27.1 million. Line haul and other revenues increased as a net result of an increase in freight rates per total mile and a nominal increase in total miles offset by an increase in deadhead miles as a percentage of total miles. Fuel surcharge revenues represent fuel costs passed on to customers based on customer specific fuel charge recovery rates and billed loaded miles. Fuel surcharge revenues decreased mostly as a result of a decrease in loaded miles during the three months ended September 30, 2012 compared to the same period of 2011.

Salaries, wages, and benefits were unchanged at $40.9 million for the three months ended September 30, 2012 and $40.9 million in the same 2011 period. This was the result of a decrease in driver wages of $0.4 million due to lower average pay rate based on driver mix, including bonuses and vacation, offset by a nominal increase in miles. Further there was a $0.3 million decrease in workers compensation due to frequency and severity of claims. These decreases were offset by $0.4 million increase in stock-based compensation due to the expense recognized on restricted stock awards granted in December 2011 and $0.4 million increase in health insurance due to frequency and severity of claims.

Rent and purchased transportation decreased $0.3 million (18.4%), to $1.5 million for the three months ended September 30, 2012 from $1.8 million in the comparable period of 2011. The decrease is mainly attributable to a decrease in amounts paid to independent contractors due to fewer miles driven as a result of fewer independent contractors driving for the Company comparing the two periods. During the three months ended September 30, 2012 and 2011 independent contractors accounted for 1.4% and 1.8%, respectively, of the total fleet miles.


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Fuel increased $1.5 million (3.6%), to $42.4 million for the three months ended September 30, 2012 from $41.0 million for the same period of 2011. The increase is primarily the result of increased fuel prices, $1.1 million and a slight increase in total miles driven. The DOE average diesel price per gallon for the three months ended September 30, 2012 was $3.96 per gallon compared to the same period of 2011 of $3.86 per gallon, a 2.5% increase. The Company had an increase in miles driven period over period which contributed to more fuel volume as well. The Company's total average fuel economy comparing the two periods was relatively flat.

Operating and maintenance expense increased $1.2 million (23.0%), to $6.5 million during the three months ended September 30, 2012 from $5.3 million in the same period of 2011. Operating and maintenance costs increased $1.0 million due to increases in tire expense.

Gains on the disposal of property and equipment decreased $5.1 million (75.4%), to $1.7 million during the three months ended September 30, 2012 from $6.8 million in the same period of 2011. The decrease was the combined effect of decreases in gains on sales of tractor equipment of $2.9 million and decreased gains on trailer equipment sales of $2.2 million. The decrease in gains on tractors and trailers was the net result of the Company selling no tractor units in the three months ended September 30, 2012 and approximately 72% less trailer units comparing the two periods. The Company will continue to upgrade its trailer fleet in the fourth quarter of 2012 and into 2013 at levels similar to levels sold during 2012 as well as begin to trade tractors due to upgrades to the tractor fleet which will begin in the fourth quarter and continue into 2013.

The Company's effective tax rate was 37.4% and 39.1% for three months ended September 30, 2012 and 2011, respectively. The decrease in the effective tax rate for 2012 is primarily attributable to a decrease in tax expense adjustments during the 2012 period compared to the same period of 2011 mainly due to an increase in favorable provision to return adjustments coupled with less taxable income during the current period compared to the same period of 2011.

As a result of the foregoing, the Company's operating ratio (operating expenses as a percentage of operating revenue) was 85.4% during the three months ended September 30, 2012 compared with 81.0% during the three months ended September 30, 2011. Net income decreased $3.0 million (19.3%), to $12.4 million for the three months ended September 30, 2012 from $15.4 million during the compared 2011 period as a result of the net effects discussed above.

Nine Months Ended September 30, 2012 Compared With the Nine Months Ended September 30, 2011

Operating revenue increased $12.1 million (3.1%), to $409.6 million for the nine months ended September 30, 2012 from $397.4 million for the nine months ended September 30, 2011. Line haul and other revenues increased $9.0 million (2.8%) mainly due to rate increases slightly offset by less loaded miles. Fuel surcharge revenue increased $3.1 million (3.9%) from $81.3 million in 2011 to $84.4 million in 2012. Fuel surcharge revenues represent fuel costs passed on to customers based on customer specific fuel charge recovery rates and billed loaded miles. Fuel surcharge revenues increased mostly as a result of a 3.0% increase in average DOE diesel fuel prices during the nine months ended September 30, 2012 compared to the same period of 2011.

Salaries, wages, and benefits increased $1.0 million (0.8%), to $125.9 million for the nine months ended September 30, 2012 from $124.8 million in the same 2011 period. The increase was the net result of a $2.0 million increase in amortization of stock-based compensation offset by $1.0 million decrease (26.6%) in workers' compensation expense. Workers' compensation decreased due to a decrease in the frequency and severity of claims. Stock-based compensation increased as a result of the amortization of restricted stock awards granted in December 2011. There were no outstanding restricted stock awards during the first nine months of 2011.

Rent and purchased transportation decreased $1.0 million (17.6%), to $4.8 million for the nine months ended September 30, 2012 from $5.8 million in the comparable period of 2011. The decrease is mainly attributable to a decrease in amounts paid to independent contractors due to fewer miles driven as a result of fewer independent contractors driving for the Company comparing the two periods. During the nine months ended September 30, 2012 and 2011 independent contractors accounted for 1.5% compared to 1.9%, respectively, of the total fleet miles.

Fuel increased $3.8 million (3.1%), to $126.3 million for the nine months ended September 30, 2012 from $122.4 million for the same period of 2011. The increase is split between increased fuel prices, $2.2 million and $1.6 million due to more miles driven. Fuel cost per mile, increased 1.8% in the 2012 period compared to the same period of 2011. The DOE average diesel price per gallon for the nine months ended September 30, 2012 was $3.96 per gallon compared to the same period of 2011 of $3.84 per gallon a 3.0% increase which was offset by 1.3% decline in gallons purchased.


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Depreciation increased $1.2 million (3.0%), to $42.2 million during the the nine months ended September 30, 2012 from $40.9 million in the same period of 2011. The increase is mainly attributable to an increase in trailer depreciation of $2.6 million due to the Company's continued upgrade of its trailer fleet which began in 2011 and has continued throughout 2012. New trailers being added are replacing trailers that had previously been depreciated to their estimated salvage values. The increase in trailer depreciation was partially offset by a decrease in tractor depreciation of $1.1 million due to the increased age of tractor equipment and the Company's policy of declining balance depreciation on tractors.

Operating and maintenance expense increased $1.9 million (11.3%), to $18.4 million during the nine months ended September 30, 2012 from $16.5 million in the same period of 2011. Operating and maintenance costs increased $3.0 million due to increases in tire expense which was offset by a reduction of $1.4 million in maintenance expense due mainly to reduced equipment trade and sale activity.

Gains on the disposal of property and equipment decreased $12.9 million (57.8%), to $9.4 million during the nine months ended September 30, 2012 from $22.3 million in the same period of 2011. The decrease was the combined effect of decreases in gains on sales of tractor equipment of $7.6 million and decreased gains on trailer equipment sales of $5.3 million. The decrease in gains on tractors and trailers was largely due to the Company selling approximately 83% less tractors and approximately 52% less trailer equipment during the nine months ended September 30, 2012 compared to the same period of 2011. The Company intends to continue to upgrade its trailer fleet during the remainder of 2012 and into 2013 with the purchase of additional new trailers in the fourth quarter of 2012 and first quarter of 2013. Further, the Company will begin a tractor upgrade during the fourth quarter of 2012 which will continue into the first half of 2013.

The Company's effective tax rate was 33.2% and 34.2% for nine months ended September 30, 2012 and 2011, respectively. The decrease in the effective tax rate for 2012 is primarily attributable to a net decrease in income before tax of $9.6 million combined with approximately the same amount of favorable income tax expense adjustments during the 2012 period compared to the same period of 2011.

As a result of the foregoing, the Company's operating ratio (operating expenses as a percentage of operating revenue) was 82.9% during the nine months ended September 30, 2012 compared with 79.9% during the nine months ended September 30, 2011. Net income decreased $5.6 million (10.5%), to $47.2 million for the nine months ended September 30, 2012 from $52.8 million during the compared 2011 period as a result of the net effects discussed above.

Liquidity and Capital Resources

The growth of the Company's business requires significant investments in new revenue equipment. Historically the Company has been debt-free, funding revenue equipment purchases with cash flow provided by operations and sales of equipment, which has been the case during the most recent tractor and trailer upgrades. The Company ended the first nine months of 2012 with cash and cash equivalents of $212.7 million, a $73.0 million increase since December 31, 2011. The Company's primary source of liquidity has historically been from operating activities which during the first nine months of 2012 was $67.5 million compared to $71.9 million during the same period of 2011. This was primarily a result of net income (excluding non-cash depreciation, non-cash amortization of stock-based compensation, changes in deferred taxes, and gains on disposal of equipment) being approximately $12.0 million lower during 2012 compared to 2011 offset by an increase in cash flow generated by operating assets and liabilities of approximately $7.6 million comparing the same two periods. The net increase in cash provided by operating assets and liabilities for the first nine months of 2012 compared to the same period of 2011 was mainly attributable to decreased spending on prepaid tires. Cash flow from operating activities was 16.5% of operating revenues for the nine months ended September 30, 2012 compared with 18.1% for the same period of 2011.

Cash flows provided by investing activities was $23.4 million during the first nine months of 2012 compared to cash flow used in investing activities of $19.4 million during the same period of 2011 or an increase of $42.8 million. The increase of investing cash flows was the result of a decrease in net capital expenditures (cash used in equipment purchases less cash provided from equipment sales) of $34.0 million due to timing of equipment sales and purchases as well as an increase in net cash (investment maturities and calls less purchases) provided by investments of $7.1 million. The increase in cash provided by calls of tax free, auction rate student loan educational bonds ("ARS"), at par, during the first nine months of 2012 compared to calls during the first nine months of 2011 is due to timing of refinance activities by the underlying debt insurers. The Company currently has outstanding net tractor purchase commitments (gross purchase price less estimated trade value) and trailer commitments of $76.5 million. Although the Company expects to sell trailers during the fourth quarter of 2012 and into 2013, as anticipated trailer purchases replace older trailers, there are no guaranteed commitments from third parties to buy trailers during 2012 and 2013 and therefore these estimated trailer proceeds have not been used to reduce the Company's outstanding commitment.


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Cash flows used by financing activities was $17.9 million during the first nine months of 2012 compared to usage of $32.5 million in the comparative period of 2011. The decrease in cash used by financing activities was due to a $14.4 million reduction in cash used in stock buy backs during the nine months ended September 30, 2012 compared to the same period of 2011.

In September, 2001, the Board of Directors of the Company authorized a program to repurchase the Company's common stock in open market or negotiated transactions using available cash, cash equivalents and investments. As of December 31, 2011 there were approximately 2.2 million shares remaining authorized for repurchase under a repurchase program. During February 2012, the Board of Directors increased the shares authorized for repurchase from the amount available to repurchase by approximately 2.8 million shares to bring the total amount of shares authorized for repurchase to 5.0 million as of February 2012. During the nine months ended September 30, 2012 there were 1.1 million shares repurchased. As of September 30, 2012 the total shares authorized for repurchase is 3.9 million shares and does not have an expiration date.

Subsequent to September 30, 2012, the Company repurchased another 0.5 million shares for $6.2 million reducing the amount of shares authorized for repurchase to 3.5 million million shares. The specific timing and amount of repurchases will be determined by market conditions, cash flow requirements, securities law limitations, and other factors. Repurchases will continue from time time, as conditions permit, until the number of shares authorized to be repurchased have been bought, or until the authorization to repurchase is terminated, whichever occurs first. The share repurchase authorization is discretionary and has no expiration date. The repurchase program may be suspended, modified, or discontinued at any time.

The Company paid income taxes, net of refunds, of $36.2 million in the first nine months of 2012 which was $19.1 million higher than income taxes paid during the same period of 2011 of $17.2 million. The increase was mainly due to higher estimated federal income tax payments comparing the two periods due to a . . .

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