Heartland Express, Inc. — Q2 2019 Form 10-Q
Business and period: Short-to-medium-haul truckload carrier focused primarily on asset-based dry-van services. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $142.1 million | $155.8 million | $281.7 million | $312.5 million |
| Operating income | $29.0 million | $22.1 million | $49.9 million | $35.1 million |
| Net income | $22.4 million | $17.8 million | $39.7 million | $31.2 million |
| Diluted EPS | $0.27 | $0.22 | $0.48 | $0.38 |
| Operating ratio | 79.6% | 85.8% | 82.3% | 88.8% |
| Adjusted operating ratio (non-GAAP) | 76.6% | 83.4% | 79.8% | 86.9% |
Six-month operating cash flow was $71.7 million, versus $69.7 million; cash flow equaled 25.4% of revenue, compared with 22.3%. Investing activities used $27.7 million, including net property and equipment purchases; financing activities used $2.0 million, primarily for dividends. Cash, cash equivalents and restricted cash totaled $224.9 million at quarter-end, including $205.6 million unrestricted cash.
At June 30, 2019, the company had no debt and $89.7 million available under its $100 million revolving credit facility, with $10.3 million of letters of credit outstanding. Total assets were $859.8 million and stockholders’ equity was $653.3 million. The company reported compliance with its credit covenants.
Changes and drivers
- Revenue fell 8.8% in Q2 and 9.9% for the first half. Management attributed the decline primarily to fewer miles driven, partly offset by higher freight rates; lower fuel-surcharge revenue also contributed. First-half volumes were affected by more severe winter weather.
- Despite lower revenue, net income increased 25.6% in Q2 and 27.2% for the first half. Lower fuel, labor, rent, maintenance and depreciation costs supported operating improvement. Gains on equipment sales were also higher: $7.5 million in Q2 and $11.4 million for the first half, versus $5.4 million and $8.3 million, respectively, a year earlier.
- The effective tax rate rose to 26.1% from 21.1% in Q2 and to 24.1% from 13.0% for the first half. The filing cites less favorable tax-return adjustments and changes in uncertain tax positions compared with 2018.
- Accounts payable and accrued liabilities increased to $23.8 million from $10.6 million at year-end 2018; total current liabilities were $76.8 million, versus $64.7 million.
Outlook, risks and contingencies
- Management gave no specific earnings or revenue guidance. It expects driver hiring and retention to remain challenging, with driver attrition a concern for the rest of 2019. Freight demand was lower than in 2018, while rates remained positive but below 2018 levels.
- Management estimated 2019 net capital expenditures of approximately $80–$100 million and equipment-sale gains of $28–$33 million; gains could vary materially with transaction timing and used-equipment prices. It expected lower depreciation expense for the remainder of 2019 compared with 2018.
- Fuel-price increases may not be fully recovered through surcharges. The filing estimates a $1-per-gallon increase could reduce 2019 pretax income by approximately $5.6 million, assuming other specified factors remain at 2018 levels; a 10% tire-price increase could add $1.5 million to tire expense.
- Estimated equipment and terminal purchase commitments were $59.2 million at June 30. Routine litigation and transportation-related claims were disclosed; management did not expect pending matters to materially harm the financial statements. Gross unrecognized tax benefits were $4.9 million, and management said they could increase by up to $1.0 million over the next 12 months.
- Management stated liquidity was adequate for foreseeable needs. Its forward-looking statements are subject to industry, driver availability, fuel and tire costs, used-equipment prices, acquisition and integration, and other risks referenced in the 2018 Form 10-K.
Important facts for investors to verify
- Whether lower freight volumes and driver attrition persist, and whether freight rates and miles driven support revenue recovery.
- How much of the margin and earnings improvement is sustainable versus attributable to equipment-sale gains and lower expenses.
- Whether projected capital spending and equipment gains align with actual purchases, sales and used-equipment market conditions.
- Developments in insurance claims, uncertain tax positions and the $59.2 million of purchase commitments.