Heartland Express, Inc. — FY 2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2018; quarterly figures below include the fourth quarter. Heartland is a U.S.-focused, short-to-medium-haul truckload carrier, primarily providing asset-based dry-van service. Its 2017 comparison includes Interstate Distributor Co. (IDC) only from its July 2017 acquisition through year-end, while the brokerage operation acquired with IDC was discontinued in Q4 2017.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Operating revenue | $610.8 million | $607.3 million |
| Operating income | $89.8 million | $63.5 million |
| Operating ratio | 85.3% | 89.5% |
| Adjusted operating ratio, excluding fuel surcharge revenue (non-GAAP) | 82.9% | 88.1% |
| Net income | $72.7 million | $75.2 million |
| Diluted earnings per share | $0.88 | $0.90 |
| Operating cash flow | $146.5 million | $109.5 million |
| Cash and cash equivalents at year-end | $161.4 million | $75.4 million |
| Long-term debt at year-end | None | None |
| Net working capital | $167.8 million | $95.5 million |
FY 2018 net margin was 11.9%, versus 12.4% in 2017. The company reported $182.9 million in cash, cash equivalents and restricted cash at year-end, including $21.5 million of restricted or designated funds. Total assets were $806.2 million and stockholders’ equity was $616.0 million.
Q4 2018: Revenue was $147.0 million, operating income $29.6 million, net income $22.4 million and diluted EPS $0.27. Q4 2017 figures were $165.7 million, $9.9 million, $38.6 million and $0.45, respectively.
Material changes versus prior periods
- FY revenue rose 0.6%; management attributed the net increase to $12.8 million more fuel-surcharge revenue, partly offset by a $9.3 million decline in trucking and other revenue. The latter reflected fewer loaded miles, partly offset by higher revenue per loaded mile, and the absence of brokerage revenue.
- Operating income increased $26.2 million and the operating ratio improved 4.2 percentage points. Expense reductions included lower salaries and benefits, rent and purchased transportation, maintenance, insurance and other operating costs. Gains on equipment disposals remained significant at $25.0 million, down from $26.7 million.
- Net income declined $2.5 million despite stronger operating income. 2017 included a $32.8 million favorable tax benefit from the Tax Cuts and Jobs Act; the 2018 effective tax rate was 20.9%, compared with negative 16.6% in 2017.
- Fuel expense increased to $110.5 million from $104.4 million as average diesel prices rose 19.8%. Fuel-surcharge revenue also increased, to $85.3 million from $72.5 million; surcharges do not recover fuel used on empty, out-of-route or idling miles.
- Operating cash flow rose to $146.5 million. Investing activities used $37.8 million, principally reflecting $38.5 million of net revenue-equipment purchases. Financing activities used $31.9 million, including $25.1 million for share repurchases and $6.6 million for dividends.
Outlook, management commentary and risks
- Management expected 2019 freight demand and capacity conditions to remain more favorable than in 2016 and early 2017, but less strong than in 2018. Driver recruiting and retention were expected to remain challenging.
- Management projected 2019 net capital expenditures of approximately $80–$100 million and estimated equipment-sale gains of $25–$30 million, subject to used-equipment market conditions. It expected tractor fleet age to increase slightly and trailer fleet age to decrease slightly.
- The company’s stated long-term objectives are significant growth, a low-80s operating ratio and a debt-free balance sheet. Its August 2018 credit facility provides a $100 million revolving line, with a possible additional $100 million accordion subject to lender discretion. Year-end availability was $89.3 million after letters of credit; the facility matures August 31, 2021. The company reported covenant compliance.
- Material risks include freight-rate and volume cyclicality, customer concentration (Walmart represented 12.5% of 2018 revenue), driver availability and compensation, fuel and equipment costs, used-equipment values, self-insured claims, regulatory changes, litigation, and cybersecurity or systems disruption. The company self-insures portions of auto, workers’ compensation and physical-damage exposure.
- Purchase commitments for revenue equipment, net of specified tractor sale commitments, were $89.0 million at year-end. Unrecognized tax-benefit obligations, including interest and penalties, totaled $5.6 million; timing of settlement is uncertain. Management considered routine litigation adequately provided for and reported no impairment charges in 2018.
- Management said 2017 internal-control material weaknesses had been remediated; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2018. The financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether the improvement in operating ratio is sustainable without relying on substantial equipment-sale gains, and how equipment gains compare with cash proceeds and replacement spending.
- Underlying trucking revenue, loaded miles and revenue per loaded mile, separated from fuel surcharges and the non-comparable IDC and brokerage effects.
- Whether the 2017 tax benefit is clearly excluded when comparing ongoing earnings, and the impact of the 2018 tax rate on future results.
- Execution of the $80–$100 million 2019 net capital-expenditure plan, fleet utilization, and the company’s ability to recruit and retain drivers.
- Liquidity available after restricted funds, letters of credit, equipment purchase commitments, dividends and repurchases; confirm the company’s continuing compliance with credit-facility covenants.
- Developments in customer concentration, self-insurance reserves and claims, state tax exposures, and material regulatory or litigation matters.