Heartland Express, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2014. Heartland is a truckload carrier focused primarily on asset-based dry-van services, with smaller temperature-controlled and brokerage operations. Results include Gordon Trucking, Inc. (GTI), acquired in November 2013; the comparable 2013 periods exclude GTI.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $217.1 | $130.6 | $668.4 | $398.9 |
| Operating income | $36.3 | $26.0 | $97.6 | $85.6 |
| Net income | $22.7 | $15.9 | $63.3 | $54.7 |
| Diluted EPS | $0.26 | $0.19 | $0.72 | $0.64 |
| Operating ratio | 83.3% | 80.1% | 85.4% | 78.5% |
| Net margin | 10.5% | 12.1% | 9.5% | 13.7% |
- Revenue rose 66.2% in Q3 and 67.5% for the first nine months, reflecting higher loaded miles and rates, as well as GTI. Fuel surcharge revenue also increased with miles.
- Net income increased 43.3% in Q3 and 15.6% year to date, but operating ratios worsened as labor, rent, purchased transportation, maintenance, and depreciation costs rose. The filing attributes much of the expense growth to the larger GTI-included business and fleet.
- Nine-month operating cash flow was $129.0 million, compared with $73.2 million. Net cash used in investing was $65.9 million, including $121.1 million of equipment purchases and $64.4 million of equipment-sale proceeds. Net financing outflow was $57.5 million, principally reflecting $54.0 million of net line-of-credit repayments. Cash increased $5.6 million to $23.3 million.
- At September 30, cash was $23.3 million; current assets were $151.9 million and current liabilities $100.4 million. Debt was $21.0 million, down from $75.0 million at December 31, 2013. The company reported $224.6 million of available revolver capacity at September 30 and compliance with its debt covenants. Restricted or designated funds of $16.8 million were included in other non-current assets and were not for general business use.
- Dividends declared were $0.02 per share in Q3 and $0.06 per share for the nine months. No open-market repurchases occurred during the nine-month period.
Material changes, outlook, and risks
- GTI and operating trends: GTI materially expanded the company’s scale, so year-over-year comparisons are not on a like-for-like basis. Management said freight demand had generally outpaced industry capacity, with driver shortages supporting rate increases, but it could not predict how long the trend would last. Driver recruitment and retention remain difficult, and management expected driver wages to continue increasing.
- Costs and fleet: Management expected 2014 net capital expenditures of approximately $120–$125 million, mainly to upgrade tractors and trailers. It expected equipment-sale activity to continue in Q4 but at a lower level than in Q2 and Q3. Equipment purchase commitments, net of tractor sale commitments, totaled $76.4 million for deliveries through the remainder of 2014 and 2015.
- Margins and taxes: Management expected the Q4 effective tax rate to be higher because it anticipated no favorable tax adjustments. For the first nine months, the tax rate was 35.0%, versus 36.3% in 2013. The filing gives no formal earnings or revenue guidance.
- Notable accounting and other items: Returning tractor depreciation to the 125% declining-balance method from 150% increased nine-month operating income by $3.3 million. Gains on equipment disposals were $27.2 million for the nine months. The 2014 period also included $1.8 million of intangible-asset amortization. GTI-related operating leases and related-party transactions are disclosed; related-party payments included equipment and terminal leases, tractor purchases, and parts and services.
- Risks and contingencies: Fuel surcharges do not fully offset fuel costs, including costs from empty or out-of-route miles and idling. Other cited risks include driver availability and regulation, customer concentration, capital needs, used-equipment values, insurance claims, and GTI integration. The company reported ordinary routine litigation, with management stating exposure was adequately provided for. Gross unrecognized tax benefits were $12.4 million; management estimated a possible decrease of $0.8–$1.8 million over the next twelve months, mainly from statute expirations. No subsequent event requiring disclosure was reported.
Important facts for investors to verify
- How much of reported growth and margin change reflects GTI versus underlying organic volume, pricing, and costs.
- Whether improved freight rates and utilization can offset driver-wage inflation and other operating-cost pressures.
- Actual 2014 capital spending, equipment-sale proceeds, and the funding required for the disclosed equipment commitments.
- The availability and terms of revolver capacity after its scheduled commitment reduction on November 1, 2014, and ongoing covenant compliance.
- The treatment and resolution of tax uncertainties, related-party leases and purchases, and the effect of equipment-sale gains and depreciation-method changes on reported earnings.