Business context and reporting period
Heartland Express, Inc. (NASDAQ: HTLD) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. It operates short- to medium-haul truckload services, primarily asset-based dry van transportation in the United States. Results include Smith Transport only from its May 31, 2022 acquisition date.
Financial results and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $187.8 million | $154.1 million | $339.1 million | $306.5 million |
| Operating income | $105.1 million | $27.4 million | $127.5 million | $45.6 million |
| Net income | $76.9 million | $20.7 million | $93.7 million | $34.5 million |
| Diluted EPS | $0.97 | $0.26 | $1.19 | $0.43 |
| GAAP operating ratio | 44.1% | 82.3% | 62.4% | 85.1% |
| Adjusted operating ratio (non-GAAP) | 78.9% | 79.7% | 80.5% | 83.1% |
GAAP operating income and margins benefited substantially from a $73.2 million gain on sale of a terminal property. The adjusted operating ratio excludes that gain and fuel surcharge revenue; it is a non-GAAP measure and is not directly comparable to the GAAP operating ratio. Fuel surcharge revenue was $36.4 million in Q2 2022 versus $19.1 million a year earlier, and $60.3 million for the first half versus $35.9 million.
Q2 revenue rose 21.9%; management attributed the increase to higher freight rates and Smith Transport, partly offset by fewer miles, as well as higher fuel surcharge revenue. For the first half, revenue rose 10.6%, with trucking and other revenue up 3.0% and fuel surcharge revenue up 68.0%. The company reported a 26.9% Q2 effective tax rate and 26.6% for the first half, versus 24.6% and 25.0%, respectively, in 2021.
Cash flow, liquidity, and debt
For the six months, operating cash flow was $58.5 million, down from $62.8 million, and equaled 17.3% of revenue versus 20.5%. Investing activities used $42.8 million, including $122.0 million net cash paid for Smith Transport, partly offset by proceeds from property and equipment sales. Financing activities used $2.8 million. Cash, cash equivalents, and restricted cash increased $12.9 million to $186.7 million; cash and cash equivalents excluding restricted cash were $171.9 million at June 30.
At June 30, the company had $10.9 million of debt and $34.7 million of finance lease liabilities, largely assumed in the Smith Transport acquisition, plus $28.8 million of operating lease liabilities. The Wells Fargo $25 million revolver had no borrowings, $10.1 million of letters of credit, and $14.9 million available capacity. The company said it complied with applicable covenants and believes liquidity is adequate for foreseeable needs. It had $66.6 million in equipment purchase commitments and anticipated $65 million to $75 million of net capital expenditures for revenue equipment and terminal projects over the remainder of 2022, subject to pricing and availability.
Material changes, outlook, and risks
- Smith Transport acquisition: Acquired May 31 for a purchase price of $169.4 million, including cash consideration and assumed indebtedness, subject to purchase accounting adjustments. Net cash paid was $122.0 million. The preliminary allocation included $40.5 million goodwill and $28.1 million intangible assets; the final allocation may differ materially. The acquired business contributed 10.4% of Q2 revenue and 5.8% of first-half revenue.
- Underlying operating performance: Management cited higher average revenue per loaded mile, improved utilization, lower empty miles, and cost controls. Excluding fuel surcharges and the terminal gain, the adjusted operating ratio improved to 78.9% for Q2 and 80.5% for the first half.
- Demand and capacity: Management described freight demand as strong but lower sequentially in Q2 than Q1 and below the exceptional levels of the second half of 2021. It expected volatile freight demand through the rest of 2022. A qualified-driver shortage continued to constrain capacity; the company had raised driver compensation multiple times in the prior year.
- Fuel, equipment, and claims: Q2 average DOE diesel prices were 70.9% higher year over year, and fuel expense rose 69.5%. Fuel surcharges do not fully recover fuel costs associated with empty or out-of-route miles and idling. Management expected continued fuel volatility, equipment cost and availability challenges, and reduced fleet trade activity. Insurance and claims expense rose amid higher claim severity and the acquisition.
- Unusual items and contingencies: Other operating expenses included a legal settlement and acquisition-related costs; the filing does not provide a clear value for the legal settlement. Acquisition-related expenses were $0.7 million in Q2. Unrecognized tax benefits were $5.8 million at June 30; management estimated they could range from no change to a $1.0 million increase over the next 12 months. The company reported routine litigation and said pending matters were adequately provided for.
- Other capital allocation: The company declared dividends of $0.02 per share in Q2. No shares were repurchased in the first half of 2022; 6.6 million shares remained authorized for repurchase.
Important facts for investors to verify
- How much of reported earnings and the sharp GAAP operating-ratio improvement reflects the terminal sale gain, versus recurring trucking operations.
- Smith Transport’s final purchase price allocation, integration progress, and contribution to results beyond the one month included in this quarter.
- Whether driver availability, freight demand, fuel-price volatility, and incomplete surcharge recovery affect volumes and adjusted margins.
- Actual capital spending against the stated remainder-of-year estimate, equipment purchase commitments, and resulting liquidity and lease or debt levels.
- Developments in the legal settlement and uncertain tax positions, including any changes in expected exposure.