Heartland Express, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Heartland is a short- to medium-haul truckload carrier, primarily providing asset-based dry-van services. Results include Millis Transfer, acquired in August 2019; the 2019 comparison periods do not include Millis. This makes year-over-year changes reflect both acquisition-related scale and underlying operating conditions.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $160.9 | $142.1 | $327.2 | $281.7 |
| Operating income | $25.0 | $29.0 | $42.3 | $49.9 |
| Net income | $19.2 | $22.4 | $32.4 | $39.7 |
| Diluted EPS | $0.24 | $0.27 | $0.40 | $0.48 |
| Operating ratio | 84.5% | 79.6% | 87.1% | 82.3% |
| Adjusted operating ratio (non-GAAP) | 83.0% | 76.6% | 85.6% | 79.8% |
Q2 revenue rose 13.2%, while net income fell 14.2%. For the first half, revenue increased 16.2% and net income declined 18.3%. The company attributed revenue growth mainly to higher miles from Millis, partly offset by lower freight rates. Net income and operating ratios were pressured principally by lower gains on equipment disposals; insurance and claims costs also increased. Net margin was 11.9% in Q2 versus 15.7% a year earlier, and 9.9% for the first half versus 14.1%.
Q2 fuel expense fell 21.6% to $18.3 million, primarily reflecting lower diesel prices; fuel surcharge revenue declined 22.7% to $14.0 million. Q2 salaries, wages, and benefits rose 27.5% to $68.1 million, mainly due to Millis. Insurance and claims expense increased 46.9% to $5.9 million, reflecting higher claim severity and frequency, premiums, and the acquired business.
Cash flow, balance sheet, and capital
- First-half operating cash flow was $83.8 million, compared with $71.7 million; cash flow from operations equaled 25.6% of revenue versus 25.4%.
- Investing activities used $63.9 million, including $82.8 million of property and equipment purchases and $18.8 million of sale proceeds. Financing activities used $15.8 million, including $12.3 million for share repurchases and $3.3 million for dividends.
- Cash, cash equivalents, and restricted cash totaled $100.1 million at June 30; unrestricted cash and cash equivalents were $82.5 million. Current assets were $169.6 million and current liabilities $71.5 million.
- No debt was outstanding. The company had $88.5 million of borrowing availability on its $100 million revolving facility after $11.5 million of letters of credit. It reported covenant compliance.
- Stockholders’ equity was $702.6 million. The company repurchased 0.7 million shares for $12.3 million in the first half; 6.2 million shares remained authorized. Quarterly dividends were $0.02 per share.
Outlook, risks, and notable items
- Management described the freight market as volatile and the economic outlook uncertain due to COVID-19. Demand weakened through early May, then improved, with stronger volumes, equipment utilization, and freight rates in the latter part of Q2. The filing provides no specific earnings or revenue guidance.
- Management expected approximately $8–9 million of combined equipment-disposal gains in Q3 and Q4, reflecting trade timing, and approximately $60–70 million of net capital expenditures for the remainder of 2020.
- Management said insurance premiums were expected to remain higher than 2019 and early-2020 levels. Effective April 1, auto liability coverage limits were reduced from $100 million to $60 million; the company warned this could increase earnings volatility given its self-insured exposure.
- The company deferred employer Social Security tax payments under the CARES Act, with half due at the end of 2021 and the remainder in 2022. It said the Act was not expected to have a material financial-statement impact.
- Purchase commitments for tractors and trailers, net of tractor sale commitments, were $72.6 million. Routine litigation was not expected by management to have a material adverse effect. Management said liquidity was adequate for foreseeable needs.
- Freight demand, driver recruitment and retention, fuel and tire prices, used-equipment values, insurance claims and premiums, and the integration and performance of Millis are key uncertainties. Management noted that higher diesel prices may not be fully recovered through fuel surcharges.
Important facts for investors to verify
- How much revenue and operating improvement is organic versus attributable to Millis, and how Millis integration and freight optimization are progressing.
- Whether the later-quarter improvement in volumes, utilization, and rates continued, given COVID-19-related demand uncertainty.
- Whether projected second-half equipment-disposal gains and capital spending occurred as expected, and their effects on earnings and cash.
- Developments in claims severity, insurance costs, and exposure following the reduction in auto liability coverage limits.
- Cash generation, equipment purchases and sale proceeds, share repurchases, and compliance with credit-facility covenants.