Heartland Express, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Heartland is a U.S.-focused short-to-medium-haul, asset-based truckload carrier operating as Heartland Express and Millis Transfer. The 2019 results include Millis Transfer only from its August 26 acquisition date.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | $596.8 million | $610.8 million |
| Operating income | $94.3 million | $89.8 million |
| Net income | $73.0 million | $72.7 million |
| Diluted EPS | $0.89 | $0.88 |
| Operating ratio | 84.2% | 85.3% |
| Adjusted operating ratio, non-GAAP | 81.9% | 82.9% |
| Net margin | 12.2% | 11.9% |
| Operating cash flow | $146.4 million | $146.5 million |
Revenue declined 2.3%, while net income was nearly flat. Operating income and margins improved despite lower revenue, supported in part by lower fuel costs and higher gains on equipment sales. Fuel surcharge revenue fell to $75.0 million from $85.3 million; trucking and other revenue also decreased. Loaded miles declined, partly offset by a higher average rate per loaded mile.
Fourth-quarter 2019 revenue was $167.2 million, operating income $17.7 million, net income $12.8 million, and diluted EPS $0.16. Fourth-quarter 2018 figures were $147.0 million, $29.6 million, $22.4 million, and $0.27, respectively.
Cash, debt, and liquidity
At year-end, cash and cash equivalents were $76.7 million; cash, cash equivalents, and restricted cash totaled $96.1 million. Heartland had no debt outstanding and reported $88.7 million of available borrowing capacity under its $100 million revolving credit facility. Net working capital was $88.4 million, compared with $167.8 million in 2018.
Operating cash flow was $146.4 million. Investing activities used $132.8 million, including $70.8 million of net revenue-equipment purchases and $61.9 million for Millis. Financing activities used $100.4 million, including repayment of $93.3 million of debt assumed with Millis and $6.6 million of dividends. Cash, cash equivalents, and restricted cash decreased by $86.9 million during the year.
Material changes and unusual items
- Heartland acquired Millis Transfer for total consideration of $156.0 million, including $62.7 million of cash and stock and $93.3 million of assumed debt, which was repaid by year-end. Millis contributed 8.8% of 2019 revenue and 21.1% of year-end assets.
- Equipment-disposal gains rose to $31.3 million from $25.0 million, primarily due to higher gains on trailer sales. Management expected 2020 gains to be about $10 million, subject to used-equipment market conditions.
- Salaries, wages, and benefits increased 5.4% to $240.1 million, reflecting Millis, the full-year effect of driver pay increases, and higher health and workers’ compensation costs. Fuel expense decreased 7.8% to $101.9 million.
- The effective tax rate increased to 24.9% from 20.9%, partly because 2018 included a favorable adjustment related to uncertain tax liabilities and tax-return adjustments.
- A customer in bankruptcy has sought return of approximately $8.0 million in payments. The filing does not state a final outcome.
Outlook, risks, and contingencies
Management expected 2019’s weaker freight-demand environment to persist early in 2020, with modest improvement later; it characterized the expected market as closer to 2016 and early 2017 than to strong 2018 conditions. Driver recruiting and retention were expected to remain challenging. Management projected 2020 net capital expenditures of approximately $120–$140 million and depreciation expense of approximately $110–$120 million. The company intends to continue its quarterly dividend, subject to board discretion; no shares were repurchased in 2019, and 6.9 million shares remained authorized for repurchase.
- Key business risks include freight-cycle weakness, customer concentration and pricing pressure, driver availability and compensation, fuel and equipment costs, and volatility in used-truck resale values.
- Heartland self-insures significant portions of auto-liability and workers’ compensation exposure. The auditor identified estimation of these claims reserves as a critical audit matter; actual claims could differ from reserves.
- Regulatory and legal uncertainties include driver hours-of-service rules, safety scores, wage-and-hour requirements, independent-contractor classification (including California’s AB5), and emissions standards.
- Purchase commitments were reported at $113.3 million, primarily for equipment and a terminal purchase. Unrecognized tax-benefit obligations, including interest and penalties, totaled approximately $6.0 million.
- Management and the auditor reported effective internal control over financial reporting at year-end, but the assessment excluded Millis, representing 21.1% of consolidated assets and 8.8% of revenue.
- The company reported an unqualified audit opinion on its financial statements. Goodwill was $168.3 million; no goodwill impairment was recorded in 2019.
Investor verification checklist
- Review the Millis acquisition’s final purchase-price allocation, integration progress, and contribution to full-year results.
- Assess the sustainability of margins given weaker freight demand, falling loaded miles, and the unusually high 2019 equipment-sale gains.
- Monitor the $8.0 million customer bankruptcy payment-recovery claim and the adequacy of insurance and claims reserves.
- Compare planned 2020 capital expenditures and equipment-sale proceeds with actual cash generation, liquidity, and fleet age.
- Verify the effect of customer concentration, driver costs and availability, regulatory developments, and Millis’s exclusion from the year-end internal-control assessment.