Heartland Express, Inc. — Q3 2021 Form 10-Q
Business context and period: Short- to medium-haul truckload carrier, primarily asset-based dry van services in the U.S. (about 99.9% of operating revenue), operating as Heartland Express and Millis Transfer. This unaudited report covers the three and nine months ended September 30, 2021; comparisons are to the same periods of 2020.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $152.6 million | $162.3 million | $459.1 million | $489.5 million |
| Operating income | $33.3 million | $27.3 million | $78.9 million | $69.7 million |
| Net income | $24.5 million | $20.7 million | $58.9 million | $53.1 million |
| Diluted EPS | $0.31 | $0.25 | $0.74 | $0.65 |
| Operating ratio | 78.2% | 83.2% | 82.8% | 85.8% |
| Adjusted operating ratio (non-GAAP) | 75.0% | 81.5% | 80.5% | 84.2% |
Q3 net margin was 16.0% versus 12.8%; nine-month net margin was 12.8% versus 10.9%. Adjusted operating ratio excludes fuel surcharge revenue from both revenue and expenses; it is a supplemental non-GAAP measure, not a substitute for GAAP results.
- Cash flow and liquidity: Nine-month operating cash flow was $95.7 million, down from $133.0 million. Cash, cash equivalents and restricted cash were $197.1 million at September 30; unrestricted cash and equivalents were $180.4 million. The company reported no debt, $14.2 million of available revolver capacity, and compliance with credit covenants.
- Capital and shareholder returns: Investing activities provided $5.0 million for the nine months, including $98.4 million in equipment-sale proceeds and $93.2 million in equipment purchases. Financing activities used $34.8 million, including $31.4 million in share repurchases. A $0.50-per-share special dividend, included in the $0.52 Q3 dividend, was paid October 1 and reduced cash by $41.1 million. Equipment purchase commitments were $42.9 million.
Material changes and management commentary
- Revenue declined 6.0% in Q3 and 6.2% for the first nine months, primarily due to fewer miles and reduced driver capacity; stronger freight rates and higher fuel surcharges partly offset the decline. Management attributed driver availability constraints to the industry-wide shortage.
- Profit and operating ratios improved despite lower revenue. Management cited higher gains on equipment disposals—$15.3 million in Q3 versus $5.7 million, and $27.3 million for nine months versus $8.7 million—as the primary driver, partly offset by higher fuel expense. Fuel expense rose 19.0% in Q3 and 13.4% for nine months, largely reflecting higher diesel prices.
- Management said freight demand and pricing remained strong and expected demand to continue through the rest of 2021 and well into 2022. It also expected the used-equipment market to remain strong in 2022, but anticipated lower fleet trade activity because of equipment production shortages and higher replacement costs.
- Management expected $15–$20 million of net capital expenditures during the remainder of 2021. It cited upward pressure on insurance premiums and continuing driver recruitment and retention challenges; wages and driver compensation had been increased multiple times over the preceding year.
Risks, contingencies, and unusual items
- Management warned that a proposed federal COVID-19 vaccination or testing mandate could increase costs, worsen driver shortages, and impair recruiting, retention, revenue, and operations; its application to professional drivers was then unclear.
- New-truck and trailer supply constraints, higher equipment prices, and volatility in used-equipment values may affect fleet replacement, maintenance, gains on sale, earnings, and cash flow. Management noted that gains on equipment sales materially supported reported results.
- Fuel surcharge arrangements do not fully offset fuel costs, particularly for empty, out-of-route, or idling miles and during periods when surcharge recovery lags price increases. Management estimated that a $1-per-gallon fuel-price increase would reduce 2021 pretax income by about $8.2 million, assuming 2020 operating patterns. A 10% tire-price increase was estimated to raise tire expense by $1.4 million.
- Routine litigation and administrative matters were described as adequately provided for, with no expected material adverse effect based on management’s current knowledge. Gross unrecognized tax benefits were $4.6 million; management estimated a possible change over the next 12 months ranging from no change to a $1.0 million increase.
Important facts for investors to verify
- How much of the earnings and margin improvement is sustainable absent unusually high equipment-sale gains?
- Whether driver availability, lower miles, and industry capacity constraints continue to limit revenue and fleet utilization.
- Whether fuel surcharge recovery keeps pace with fuel prices, and how fuel and tire costs affect margins.
- The cash and capital-allocation impact of the October special dividend, ongoing repurchases, equipment commitments, and reduced planned fleet trades.
- Developments in the proposed vaccination/testing requirements, equipment supply, insurance costs, and uncertain tax positions.