Heartland Express, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Heartland is a short-to-medium-haul truckload carrier, operating under the Heartland Express and Millis Transfer brands, primarily hauling dry van freight in the U.S. The 2020 results include Millis for the full periods; 2019 comparisons include Millis only from its August 26, 2019 acquisition date.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $162.3 million | $147.9 million | $489.5 million | $429.6 million |
| Operating income | $27.3 million | $26.7 million | $69.7 million | $76.6 million |
| Net income | $20.7 million | $20.5 million | $53.1 million | $60.2 million |
| Diluted EPS | $0.25 | $0.25 | $0.65 | $0.73 |
| Operating ratio | 83.2% | 81.9% | 85.8% | 82.2% |
| Adjusted operating ratio (non-GAAP) | 81.5% | 79.4% | 84.2% | 79.6% |
Q3 revenue grew 9.7% and net income rose 1.0% year over year. For the nine months, revenue grew 13.9%, while net income declined 11.7%. Net margin was 12.8% in Q3 and 10.9% for the nine-month period, versus 13.9% and 14.0%, respectively, in 2019.
- Cash flow and investment: Nine-month operating cash flow was $133.0 million, up from $109.4 million, or 27.2% of revenue versus 25.5%. Investing activities used $112.3 million; property and equipment purchases were $163.8 million, partly offset by equipment-sale proceeds. Financing activities used $17.6 million, including $12.3 million of share repurchases and $4.9 million of dividends.
- Liquidity and debt: September 30 cash and cash equivalents were $81.9 million; cash, cash equivalents and restricted cash totaled $99.2 million, including $17.2 million of restricted/designated funds. The company had no debt, $88.5 million available on its $100 million revolving facility after letters of credit, and reported compliance with its covenants.
- Balance sheet: Total assets were $959.8 million and stockholders’ equity was $721.7 million at September 30, 2020. Current assets were $173.6 million and current liabilities were $84.2 million.
Material changes and management commentary
- Management said freight volumes, equipment utilization and average freight rates improved progressively from early May through Q3 as freight supply and demand became more favorable. The near-term freight outlook remained uncertain given COVID-19 and the economic environment.
- Management attributed revenue growth mainly to higher miles from Millis and, in Q3, improved miles and freight rates; lower fuel-surcharge revenue partially offset the increase. The nine-month comparison also reflects Millis being included for a longer period in 2020.
- Lower gains on equipment disposals materially pressured year-over-year operating results: gains were $5.7 million in Q3 2020 versus $12.6 million, and $8.7 million for nine months versus $24.0 million. Management cited equipment-sale timing and lower sales volume.
- Insurance and claims expense rose 48.2% in Q3 and 33.3% for nine months, attributed to higher claim severity and frequency, premiums, and Millis. The company reduced its upper auto-liability coverage limit from $100 million to $60 million effective April 1, 2020, and cautioned that future insurance expense may be more volatile.
- To address driver hiring and retention challenges, the company increased driver compensation effective October 31, 2020; the average wage increase for legacy Heartland drivers was expected to be about 6%, raising Q4 expense.
Outlook, risks and unusual items
- Management expected $6 million to $9 million of net capital expenditures for the remainder of 2020 and approximately $4 million to $5 million of equipment-disposal gains in Q4. These are management estimates, not full-year earnings guidance.
- Management said liquidity was adequate for foreseeable needs, with long-term capital needs expected to be funded by operating cash flow, used-equipment sale proceeds and available credit. The revolving facility was scheduled to mature August 31, 2021.
- COVID-19-related operating uncertainty, driver availability and retention, cyclical freight demand and rates, fuel and tire prices, used-equipment values, and insurance claims are key risks. Fuel surcharges do not fully offset fuel costs, particularly for empty, out-of-route and idle miles. The filing estimates a $1-per-gallon fuel-price increase would reduce 2020 pretax income by about $7.2 million under stated assumptions; a 10% tire-price increase would add about $1.3 million in expense.
- The CARES Act allowed deferral of employer Social Security taxes; $6.0 million was deferred at September 30, 2020, with payments due in 2021 and 2022. Management did not expect the CARES Act to materially affect the financial statements.
- Gross unrecognized tax benefits were $4.7 million. Management estimated the amount could range from no change to an increase of $1.0 million over the next 12 months. Routine litigation and claims were described as adequately provided for; management did not expect pending matters to have a material adverse effect.
- After quarter-end, the company repurchased 0.6 million shares for $10.8 million. The filing reported 6.2 million shares remaining authorized under its discretionary repurchase program at September 30.
Important facts for investors to verify
- How much of revenue growth and expense growth reflects Millis inclusion versus organic miles, freight rates and operating performance.
- Whether operating margins improve as freight conditions evolve, and how much reported earnings depend on equipment-disposal gains and their timing.
- Whether elevated insurance and claims costs persist, particularly following the reduction in auto-liability coverage limits.
- How the planned driver-pay increase affects Q4 and subsequent labor costs, and whether the company can recruit and retain enough drivers.
- Cash generation after fleet investment, share repurchases and dividends; confirm the effect of deferred payroll taxes and subsequent share buybacks on liquidity.
- Resolution and potential changes in uncertain tax positions, as well as compliance with the credit facility and its August 2021 maturity.