Heartland Express, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Dollar amounts below are in millions unless noted. Heartland is a short-to-medium-haul truckload carrier, primarily providing asset-based dry-van transportation.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $160.8 | $191.7 | $323.6 | $379.2 |
| Operating income | $24.5 | $35.7 | $44.8 | $64.0 |
| Net income | $16.4 | $23.3 | $30.7 | $40.9 |
| Diluted EPS | $0.20 | $0.27 | $0.37 | $0.47 |
| Operating ratio | 84.8% | 81.4% | 86.2% | 83.1% |
| Adjusted operating ratio (non-GAAP) | 83.2% | 78.5% | 84.8% | 80.5% |
Q2 revenue fell 16.1% and net income fell 29.8% year over year; six-month revenue declined 14.7% and net income 24.9%. Six-month net margin was 9.5%, versus 10.8% a year earlier. The company declared dividends of $0.02 per share in Q2 and $0.04 per share for the first half.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $77.9, down from $101.7 in 2015. Investing cash flow used $15.5; financing cash flow used $18.0, including $14.7 of share repurchases and $3.3 of dividends. Cash increased $44.4 to $77.6.
- At June 30, total assets were $742.1 and stockholders’ equity was $483.3. Current assets were $162.7 and current liabilities $82.6.
- No debt was outstanding. The revolving credit facility had $194.5 available (including the effect of $5.5 in letters of credit); the company reported covenant compliance. The facility matures October 31, 2018.
- Management estimated 2016 net capital expenditures of approximately $30–$40 and equipment-purchase commitments of $22.4 for the remainder of 2016.
Material changes and management commentary
- Management attributed lower trucking revenue primarily to fewer loaded miles, fewer drivers and softer freight demand, partly offset by a higher rate per loaded mile. Lower fuel prices and fewer miles also reduced fuel-surcharge revenue.
- Insurance and claims expense rose 43.5% in Q2 and 29.3% for the first half, attributed to increased claim severity and frequency. Gains on equipment disposals declined substantially year over year, particularly on trailer sales.
- Management expected 2016 equipment-sale gains of approximately $7.5–$8.5, with equipment-sale activity expected to be significantly below 2015 levels. No earnings or revenue guidance was provided.
- Management cited driver recruitment and retention challenges, industry capacity and freight-demand volatility, and uncertainty about fuel prices. It said fuel surcharges may not offset fuel costs on empty, out-of-route and idling miles.
- The company prospectively adopted deferred-tax balance-sheet classification guidance in 2016, presenting deferred tax balances as noncurrent; prior periods were not adjusted. Management was evaluating new lease, revenue-recognition and stock-compensation accounting standards.
Risks, contingencies and unusual items
- Gross unrecognized tax benefits were $9.4 at June 30, down from $11.6 at year-end. Management estimated a possible further decrease of $1.2–$2.2 over the next 12 months, mainly from statute expirations.
- The company reported routine litigation and administrative proceedings, with exposure considered adequately provided for. It self-insures a significant portion of claims.
- Certain terminal and revenue-equipment leases and purchases involved related parties associated with a board member. Revenue-equipment leases with the dealership were terminated in June 2016; some terminal leases continue through 2018.
- Management reduced the potential acquisition earn-out liability after revising assumptions about future payouts. Actual results may differ from estimates.
Important facts for investors to verify
- Whether freight demand, loaded miles, driver availability and rates stabilize or continue to pressure revenue and operating ratios.
- Developments in claim frequency and severity, self-insurance accruals, and the impact on operating costs.
- Progress against the stated 2016 capital-expenditure estimate and equipment-sale-gain outlook.
- Resolution and timing of uncertain tax positions, including the expected statute-of-limitations reductions.
- Terms and governance of continuing related-party arrangements, as well as liquidity and covenant capacity if borrowing needs rise.