Heartland Express, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 28, 2017. This is an annual report, not a standalone fourth-quarter filing. Heartland is a U.S. short- and medium-haul truckload carrier, primarily providing asset-based dry-van service. Its acquired Gordon Trucking operations were merged into Heartland Express of Iowa effective July 1, 2016.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Operating revenue | $612.9 million | $736.3 million |
| Operating income | $85.6 million | $116.6 million |
| Net income | $56.4 million | $73.1 million |
| Diluted EPS | $0.68 | $0.84 |
| Operating ratio | 86.0% | 84.2% |
| Adjusted operating ratio, excluding fuel surcharges | 84.6% | 81.9% |
| Net margin | 9.2% | 9.9% |
| Operating cash flow | $155.8 million | $190.5 million |
At year-end, cash and cash equivalents were $128.5 million, working capital was $136.6 million, total assets were $738.2 million, and shareholders’ equity was $505.8 million. The company had no debt outstanding and reported $169.5 million of available borrowing capacity under its credit agreement. Operating cash flow less net investing cash outflow was approximately $116.6 million; investing cash outflow was $39.2 million, including $28.8 million of net revenue-equipment purchases and $9.3 million designated for future equipment purchases. Dividends paid were $6.7 million and share repurchases were $14.7 million.
Fourth-quarter 2016 revenue was $140.0 million and net income was $13.1 million, compared with $174.6 million and $17.0 million, respectively, in fourth-quarter 2015.
Material changes versus the prior year
- Revenue declined 16.8%; trucking revenue fell $90.0 million and fuel-surcharge revenue fell $33.4 million. Loaded miles decreased 15.5%, partly offset by a higher rate per loaded mile.
- Management said freight demand weakened significantly in 2016 while industry capacity exceeded demand, and shipper bidding activity put pressure on pricing. The company reduced fleet size to match capacity with freight it considered more attractive.
- Fuel expense fell 26.0%, reflecting lower fuel prices, fewer miles, improved fuel economy, and operating efficiencies. Fuel surcharge revenue declined to $58.4 million from $91.8 million.
- Gains on equipment disposals dropped to $9.2 million from $35.0 million, materially reducing earnings. The 2015 comparison also included a stronger used-equipment sales environment.
- Insurance and claims expense rose 13.1% to $24.4 million, attributed to increased claim frequency and severity. Other operating expense fell by $15.2 million, including a $12.2 million reduction in the estimated GTI earn-out liability.
- Cash increased by $95.3 million during the year, while operating cash flow declined from 2015. The company repurchased 0.9 million shares in 2016, versus 3.8 million in 2015.
Outlook, commentary, and risks
- Management set no specific revenue or earnings guidance. It estimated 2017 net capital expenditures of approximately $40–$50 million and anticipated equipment-sale gains of $20–$30 million, subject to used-equipment prices and the timing of sales.
- Heartland expected industry capacity to tighten after the December 2017 ELD mandate, but the timing and extent of any market improvement were uncertain. Fuel prices had risen 11.3% through February 17, 2017, compared with the 2016 average.
- The company’s stated long-term objectives are significant growth, a low-80s operating ratio, and a debt-free balance sheet. It was evaluating acquisition candidates but reported no acquisition agreements.
- Fuel-price exposure remains: management estimated that a $1-per-gallon increase, assuming 2016 operating conditions, would reduce pretax income by about $6.3 million. Fuel surcharges do not recover all fuel costs, including those associated with empty and out-of-route miles and idling.
- Customer concentration is significant: the top five customers accounted for about 40% of 2016 revenue, and Walmart represented 12.3%. Driver availability and compensation, cyclical freight demand and rates, used-equipment values, and self-insured claims are additional material risks.
- Regulatory uncertainties include hours-of-service rules, driver safety-rating changes, emissions and fuel-efficiency requirements, and wage-and-hour and independent-contractor classification issues. The company self-insures portions of auto liability, workers’ compensation, cargo, and physical-damage exposures.
- The company reported ordinary-course litigation and said management considered its provision adequate. KPMG issued an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether freight volumes, rates, and utilization stabilize after the 2016 decline, and how the fleet-size reductions affect revenue and margins.
- Whether projected 2017 equipment-sale gains and capital expenditures are realized; gains on disposals were substantially lower in 2016.
- Developments in insurance and claims costs, including reserve adequacy, given the 2016 expense increase and the company’s self-insured exposures.
- Customer concentration and retention, particularly the contribution from Walmart and the top five customers.
- The company’s liquidity and capital allocation, including its credit-facility maturity on October 31, 2018, planned equipment commitments, dividends, and discretionary repurchases.
- The status and financial consequences of the GTI earn-out and the company’s state tax contingencies and unrecognized tax benefits.