Business context and reporting period
Heartland Express, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. It operates primarily as a short-to-medium-haul, asset-based truckload carrier, with dry-van services across the United States and parts of Canada.
Comparisons with 2017 are affected by the July 2017 acquisition of Interstate Distributor Co. (IDC): 2018 results include IDC, while the comparable 2017 periods do not. The company reports one operating segment.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $155.8 million | $129.6 million | $312.5 million | $259.5 million |
| Operating income | $22.1 million | $21.3 million | $35.1 million | $40.7 million |
| Net income | $17.8 million | $14.6 million | $31.2 million | $28.7 million |
| Diluted EPS | $0.22 | $0.18 | $0.38 | $0.34 |
| Operating ratio | 85.8% | 83.6% | 88.8% | 84.3% |
| Adjusted operating ratio, excluding fuel surcharge revenue | 83.4% | 81.4% | 86.9% | 82.3% |
Q2 net margin was 11.4%, versus 11.3% a year earlier; six-month net margin was 10.0%, versus 11.0%. Adjusted operating ratio is a non-GAAP measure; the company says it excludes fuel-surcharge volatility.
Cash, liquidity and capital
- Six-month operating cash flow was $69.7 million, up from $50.8 million. Investing activities used $22.1 million, including net equipment purchases; financing activities used $24.4 million, mainly for $20.9 million of share repurchases and $3.3 million of dividends.
- Cash and cash equivalents were $106.4 million at June 30; total cash, cash equivalents and restricted cash were $129.3 million. Restricted and designated funds of $22.9 million were not available for general business use.
- No long-term debt was outstanding. The revolving credit facility had $171.3 million available, subject to $3.7 million of letters of credit. It matures October 31, 2018; management expected to renegotiate and extend it before maturity.
- Net capital expenditures for calendar 2018 were estimated at $70–$80 million. The company had $67.2 million of estimated equipment purchase commitments, net of tractor sale commitments, at June 30.
- The company repurchased 1.2 million shares for $20.9 million during the first six months and another 0.2 million shares for $4.2 million after quarter-end. It declared dividends of $0.04 per share for the six-month period.
Material changes and management commentary
- Q2 revenue rose 20.2%; six-month revenue rose 20.4%. Management attributed growth to IDC, higher miles and rates, and increased fuel surcharges. Excluding fuel surcharge revenue, six-month revenue rose 16.8%; miles increased 9.8%.
- Despite revenue growth, operating ratios worsened year over year. Management cited higher fuel prices, driver and employee costs, equipment depreciation, and insurance claims; lower equipment-disposal gains also weighed on results. Average DOE diesel prices rose 25.3% in Q2 and 21.6% in the first half year over year.
- The lower effective tax rate—21.1% in Q2 and 13.0% for the first half, versus 32.8% and 30.8%—reflects the federal Tax Act, favorable tax-return adjustments, and reversals of uncertain-tax-position accruals as statutes expired. The state-tax effects of the Tax Act remained subject to revision.
- Management expected favorable freight demand relative to capacity for most of 2018, but anticipated continued driver shortages and attrition, with driver compensation costs remaining inflationary. A driver pay increase averaging approximately 4% took effect July 7, 2018.
- Management estimated 2018 equipment-disposal gains of $20–$30 million and expected to sell 10–15% fewer units than in 2017. These estimates depend on used-equipment market conditions, which may be volatile. It also expected lower equipment and terminal lease expense in the remainder of 2018 as leases terminated.
- The company estimated that a $1-per-gallon year-over-year increase in fuel would reduce 2018 pretax income by approximately $6.3 million; a 10% increase in tire prices would add approximately $1.5 million to tire expense.
Risks, contingencies and controls
- Disclosure controls and procedures were deemed ineffective at June 30 because of material weaknesses in internal control over financial reporting previously reported in the 2017 Form 10-K. Remediation steps were underway, but the weaknesses had not been stated as remediated.
- Principal operating risks include driver recruitment and retention, fuel and tire prices, competition, customer concentration, equipment costs and resale values, regulation, self-insured claims, and successful integration of acquisitions. Ordinary-course litigation is ongoing; management believes exposure is adequately provided for.
- Gross unrecognized tax benefits were $3.9 million at June 30. Management said a decrease of approximately $0.5–$1.0 million over the next 12 months was reasonably possible, mainly from statute expirations.
- The company had related-party terminal leases and transactions for parts and services involving entities associated with board members. It reported ordinary-course payments and said the leases originated with a prior acquisition.
Important facts for investors to verify
- Whether the company extended or replaced its revolving credit facility before its October 31, 2018 maturity.
- Progress and timing in remediating the disclosed material weaknesses in financial reporting controls.
- Whether freight demand, driver availability, compensation costs, and fuel-surcharge recovery support improved operating ratios.
- Actual capital spending, equipment-sale gains, used-equipment values, and lease-cost reductions compared with management’s estimates.
- Changes in tax estimates and uncertain tax positions, and the effect of state conformity to the Tax Act.