Heartland Express, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Heartland is a short-to-medium-haul truckload carrier. Results include Interstate Distributor Co. (IDC), acquired in July 2017; Q1 2017 results do not, limiting comparability.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $156.7 million | $129.9 million |
| Operating income | $12.9 million | $19.4 million |
| Net income | $13.4 million | $14.0 million |
| Diluted EPS | $0.16 | $0.17 |
| Operating ratio | 91.7% | 85.1% |
| Adjusted operating ratio, excluding fuel surcharge (non-GAAP) | 90.4% | 83.2% |
| Cash from operations | $32.2 million | $32.1 million |
Operating revenue increased 20.6%, including fuel surcharge revenue of $21.5 million versus $14.9 million. Management attributed growth to IDC, 14.7% more loaded miles, and higher rates per loaded mile. Net income declined despite higher revenue as operating costs rose and gains on equipment sales fell. Operating margin was 8.3%, compared with 14.9%.
At March 31, cash and cash equivalents were $105.0 million; cash, cash equivalents and restricted cash totaled $129.8 million. Current assets were $209.2 million and current liabilities $98.4 million. The company had no debt outstanding, $171.3 million of available revolver capacity after letters of credit, and was in covenant compliance. The $175 million revolving facility matures October 31, 2018.
Net investing cash outflow was $5.5 million, including $32.0 million of equipment purchases and $26.1 million of sale proceeds. Financing cash outflow was $3.1 million, including $1.7 million in dividends and $1.3 million in share repurchases. Cash and cash equivalents increased $29.6 million during the quarter.
Changes, outlook and risks
- Salaries, wages and benefits rose 26.6%, reflecting the IDC workforce and a driver pay increase implemented in October 2017. Rent and purchased transportation, fuel, and maintenance costs also increased. Claims expense rose amid increased claim severity and frequency.
- The effective tax rate was negative 0.7%, versus 28.6% a year earlier, reflecting the Tax Act, favorable return adjustments, and reversals of certain tax accruals. Tax Act accounting remained provisional and could change as states’ conformity becomes clearer.
- Management expected favorable freight demand and capacity conditions for most of 2018, but identified driver attrition and hiring and retention as ongoing challenges. Fuel prices were not predictable; surcharge arrangements do not recover all fuel costs or eliminate timing exposure.
- Management estimated 2018 net capital expenditures of approximately $85–$95 million. It anticipated equipment sales about 20% below 2017 and total equipment-sale gains of $20–$30 million, subject to used-equipment market volatility. Management said liquidity was adequate for foreseeable needs.
- Risks include fuel and tire cost increases, driver availability and compensation, customer concentration, equipment investment and resale values, regulation, self-insured claims, and integration of acquisitions. Ordinary-course litigation is described as adequately provided for; tractor and trailer purchase commitments totaled $70 million at quarter-end.
- Disclosure controls were not effective at March 31 because of material weaknesses in internal control over financial reporting identified in the 2017 Form 10-K. Remediation was underway, including enhanced documentation and monitoring; a third-party consultant was engaged after quarter-end.
- After quarter-end through May 10, the company repurchased 0.9 million shares for $16.6 million.
Investor verification priorities
- Assess the underlying trend in revenue, margins and costs while separating IDC’s contribution from organic performance.
- Review driver hiring and retention, compensation costs, fuel-surcharge recovery, and claims experience.
- Check execution of the capital expenditure and equipment-sale plans, including used-equipment pricing and projected gains.
- Monitor the revolver’s October 2018 maturity and any refinancing or replacement arrangements.
- Track completion of internal-control remediation and any changes to provisional Tax Act estimates or uncertain tax benefits.
- Consider the pace and funding of subsequent share repurchases alongside liquidity and investment needs.