Heartland Express, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Heartland provides truckload transportation, primarily U.S. dry van services, with cross-border and other services. Results include Smith Transport and CFI; the prior-year periods include Smith only for June 2022 and do not include CFI, limiting comparability.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $306.2 | $187.8 | $637.1 | $339.1 |
| Operating income | $16.2 | $105.1 | $39.1 | $127.5 |
| Net income | $7.8 | $76.9 | $20.4 | $93.7 |
| Diluted EPS | $0.10 | $0.97 | $0.26 | $1.19 |
| GAAP operating ratio | 94.7% | 44.1% | 93.9% | 62.4% |
| Adjusted operating ratio | 93.4% | 78.1% | 92.4% | 79.8% |
Adjusted operating ratio is a non-GAAP measure. The unusually strong 2022 comparison benefited from a $73.2 million gain on sale of a terminal property, which did not recur. Adjusted operating income was $17.5 million in Q2 2023 versus $33.2 million a year earlier, and $41.7 million for the first half versus $56.4 million. The company attributes ongoing pressure to the acquired businesses’ higher cost structure and is pursuing cost reductions and freight optimization.
First-half operating cash flow was $97.3 million, compared with $58.5 million; it equaled 15.3% of revenue versus 17.3%. Investing cash outflow was $33.8 million and financing cash outflow was $66.5 million, including $64.8 million of debt and finance-lease repayments. Cash, cash equivalents and restricted cash ended at $61.5 million, including $46.3 million of unrestricted cash.
Debt, liquidity and capital
- At June 30, 2023, the company reported $315.0 million outstanding under its term facility, no revolver borrowings, and $88.0 million of revolver capacity available after letters of credit.
- Management reported $322.0 million of net debt, $26.8 million in finance lease liabilities, and $14.5 million in operating lease obligations. The weighted-average rate on Credit Facilities borrowings was 6.6%.
- The company repaid $64.8 million of debt and finance leases in the first half. Term-loan amortization is scheduled to begin in September 2023; the filing says repayments made through June cover required minimum payments through March 2026.
- Financial covenants were met at quarter-end. The filing estimates a 1.0 percentage-point SOFR increase would add approximately $3.2 million to annual interest expense.
- First-half property and equipment purchases were $108.0 million and sale proceeds were $73.8 million. Estimated equipment purchase commitments were $55.7 million through the remainder of 2023.
Outlook, risks and contingencies
- Management described freight demand as weak and below normal seasonal levels, with rate pressure and volatile demand expected for at least the next quarter. It looked to the fourth-quarter holiday season for potential improvement but gave no revenue or earnings forecast.
- Management expects 2023 depreciation expense of $195–$205 million, net tractor and trailer capital expenditures of $65–$75 million, and equipment-disposal gains of $15–$20 million.
- Fuel prices, unproductive miles, driver availability, fleet and parts costs, and interest rates remain sensitivities. A $1 increase in average fuel price per gallon was estimated to reduce 2023 pretax income by about $9.3 million, assuming specified operating conditions; a 10% tire-price increase was estimated to reduce pretax income by $2.0 million.
- The April 2023 auto-liability renewal raised the company’s retention to $3.0 million per claim; insurance covers losses above that amount up to $80.0 million, with the company retaining amounts above $80.0 million. Management expects third-quarter insurance and claims expense to remain elevated and says claims experience may increase expense volatility.
- Ordinary-course litigation is described as adequately provided for. The company disclosed $5.5 million of gross unrecognized tax benefits and estimated that the amount could range from no change to a $1.0 million increase over the next 12 months.
- Management said liquidity was adequate for foreseeable needs. It intends to pay down acquisition-related debt while maintaining regular dividends; it does not currently expect special dividends, share repurchases, or significant acquisitions while debt is being repaid.
Important facts for investors to verify
- How quickly CFI and Smith improve their cost structure and operating ratios, and how much of the first-half performance reflects acquired operations rather than comparable organic trends.
- Whether freight demand and pricing recover, and whether management meets its 2023 depreciation, capital-spending, and equipment-gain expectations.
- Debt repayment progress, variable-rate exposure, covenant headroom, and the scheduled commencement of term-loan amortization.
- Actual insurance and claims costs under the higher retention limit, including the effect of claim severity and frequency.
- Cash conversion and equipment-sale proceeds relative to fleet investment and the stated purchase commitments.