Heartland Express, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the same periods in 2020. Heartland is a short-to-medium-haul truckload carrier, primarily providing asset-based dry-van service in the U.S. The interim financial statements are unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Operating revenue | $154.1m | $160.9m | $306.5m | $327.2m |
| Operating income | $27.4m | $25.0m | $45.6m | $42.3m |
| Net income | $20.7m | $19.2m | $34.5m | $32.4m |
| Diluted EPS | $0.26 | $0.24 | $0.43 | $0.40 |
| Operating ratio | 82.3% | 84.5% | 85.1% | 87.1% |
| Adjusted operating ratio (non-GAAP) | 79.7% | 83.0% | 83.1% | 85.6% |
Q2 net margin was approximately 13.5% versus 11.9%; first-half net margin was 11.2% versus 9.9%. First-half operating cash flow was $62.8m, down from $83.8m, and equaled 20.5% of revenue versus 25.6%. Investing activities provided $8.3m, compared with $63.9m used in the prior-year period, reflecting higher equipment-sale proceeds and lower equipment purchases. Financing used $18.3m, mainly for share repurchases and dividends.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $167.2m; cash, cash equivalents and restricted cash totaled $183.9m. Total assets were $957.0m.
- No debt was outstanding. The revolving facility had $88.9m available after $11.1m of letters of credit; the $100m facility was due to expire August 31, 2021. Management said it was reviewing options and expected to negotiate terms before expiration.
- First-half capital expenditures were $47.6m, while equipment-sale proceeds were $56.0m. Management expected net capital expenditures of approximately $35m–$45m for the remainder of 2021. Equipment purchase commitments were $61.7m through the remainder of 2021 and into 2022.
- The company repurchased 0.8m shares for $14.5m in the first half and paid $3.2m in dividends. A further 0.4m shares were repurchased for $7.2m after quarter-end. The repurchase program had 4.7m shares remaining authorized.
Material changes and management commentary
- Revenue declined 4.2% in Q2 and 6.3% in the first half. Lower miles, attributed primarily to fewer available drivers, outweighed higher freight rates; first-half revenue was also affected by severe February weather and driver pay protection during shutdowns.
- Net income increased 8.1% in Q2 and 6.3% in the first half despite lower revenue. Management attributed improved operating ratios primarily to higher gains on equipment sales, with cost-reduction and freight-optimization efforts at Millis Transfer also ongoing.
- Q2 equipment-disposal gains were $7.9m versus $3.2m; first-half gains were $12.1m versus $3.0m. Higher fuel prices partly offset the benefit: Q2 fuel expense increased 35.6%, primarily due to a 32.2% increase in average diesel prices.
- Management described freight demand and pricing as strong through the first half of 2021, while noting continued driver shortages and competition. Driver wages and compensation had been increased multiple times in the prior nine months; a joint driver-training school was expected to open in Carlisle, Pennsylvania in Q3 2021.
- Fuel surcharges do not recover all fuel costs, particularly for empty or out-of-route miles and idling, and recovery can lag price increases. Management estimated that a $1-per-gallon year-over-year fuel-price increase would reduce 2021 pretax income by approximately $8.2m, assuming other stated factors remain constant. A 10% tire-price increase was estimated to raise tire expense by $1.4m.
Risks, contingencies and unusual items
- Management said liquidity was adequate for foreseeable needs. The expiring credit facility, driver availability, freight cycles, fuel and tire prices, and insurance costs are key areas to monitor. Per-unit insurance costs were rising amid limited industry capacity and the legal environment.
- The company had $9.2m of deferred employer Social Security taxes under the CARES Act at June 30; half was due in December 2021 and the remainder in December 2022.
- Gross unrecognized tax benefits were $4.6m. Management estimated the amount could range from no change to an increase of $1.0m over the next 12 months.
- Routine litigation and administrative claims, including personal injury, property damage, cargo and workers’ compensation matters, were not expected by management to materially adversely affect the financial statements. No tax litigation was outstanding.
- Management identified no significant change in accounting estimates or policies; adoption of the income-tax accounting standard had an immaterial impact. Disclosure controls were considered effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether Heartland renewed or replaced its $100m revolving facility before its August 31, 2021 expiration, and the resulting terms and availability.
- Whether driver capacity and loaded miles improved, and whether freight-rate strength continued enough to offset wage and fuel pressures.
- How much of operating income and margin improvement depended on used-equipment sale gains, and whether such gains were sustainable.
- Actual remaining-2021 capital spending versus management’s $35m–$45m net estimate, and the timing and funding of the $61.7m equipment commitments.
- Progress on the post-quarter share repurchases, the CARES Act payroll-tax repayments, and resolution of unrecognized tax benefits and routine claims.