Heartland Express, Inc. — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Heartland is a short- to medium-haul truckload carrier, primarily providing asset-based dry-van service in the United States; it reports one operating segment.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenue | $152.4 million | $166.3 million | Down 8.4% |
| Operating income | $18.3 million | $17.3 million | Up 5.5% |
| Net income | $13.7 million | $13.2 million | Up 3.7% |
| Diluted EPS | $0.17 | $0.16 | Up $0.01 |
| Operating ratio | 88.0% | 89.6% | Improved 1.6 percentage points |
| Adjusted operating ratio (non-GAAP) | 86.5% | 88.2% | Improved 1.7 percentage points |
| Operating cash flow | $35.4 million | $40.1 million | Down $4.6 million |
Net margin was 9.0% versus 8.0%; operating margin was 12.0% versus 10.4%. The improved operating results and ratios were primarily attributable to higher gains on equipment disposals, which management said reflected trade timing and higher sales volume. Adjusted operating ratio is a company-defined non-GAAP measure; the filing cautions it is not a substitute for GAAP results.
Liquidity, debt and capital
- At March 31, cash and cash equivalents were $148.2 million; cash, cash equivalents and restricted cash totaled $165.3 million. Restricted and designated funds of $17.1 million were not available for general business use.
- No debt was outstanding. The company reported $88.5 million available on its $100 million revolving credit facility, with $11.5 million in letters of credit outstanding. The facility was scheduled to mature August 31, 2021.
- Operating cash flow was $35.4 million. Investing activities provided $15.5 million, including $25.2 million of equipment-sale proceeds and $9.8 million of property and equipment purchases. Financing activities used $16.7 million, including $15.0 million in share repurchases and $1.6 million in dividends.
- Management expected net capital expenditures of approximately $85–$95 million during the remainder of 2021. Equipment purchase commitments, net of tractor sale commitments, totaled $121.3 million through year-end.
- The company repurchased 0.8 million shares for $14.5 million and declared dividends of $0.02 per share. Approximately 4.7 million shares remained authorized for repurchase.
Material changes and management commentary
- Revenue fell mainly because fewer drivers reduced available capacity and miles driven; higher freight rates partly offset the decline. February severe winter weather also affected revenue, while the company continued paying drivers during extended safety-related shutdowns.
- Fuel-surcharge revenue decreased to $16.8 million from $19.5 million, primarily due to fewer miles. Total operating revenue includes fuel surcharges.
- Driver shortages and competition intensified with stronger freight demand. Heartland said it expected additional driver-pay enhancements in Q2 2021, following a roughly 6% average wage increase for legacy Heartland drivers in Q4 2020.
- Management described freight demand and pricing as improving through the second half of 2020 and into Q1 2021. It provided no full-year earnings or revenue guidance in the supplied filing text.
- The company continued cost-reduction and freight-optimization efforts at Millis Transfer. It planned to open a joint driver-training school in Carlisle, Pennsylvania, in Q2 2021.
Risks, contingencies and unusual items
- Rising fuel prices may not be fully recovered through surcharges, particularly for empty, out-of-route and idling miles. Management estimated that a $1.00-per-gallon year-over-year fuel-price increase would reduce 2021 pretax income by approximately $8.2 million, assuming specified operating factors remained at 2020 levels.
- A 10% increase in tire prices would increase tire purchase expense by an estimated $1.4 million, with a corresponding reduction in pretax income.
- Operating income benefited from a $4.2 million gain on equipment disposals, compared with a $0.2 million loss in Q1 2020. This was a significant factor in the improved operating ratio and year-over-year profit comparison.
- The company had $8.9 million of deferred employer Social Security taxes under the CARES Act at March 31, 2021; repayment was due in installments in December 2021 and December 2022.
- Gross unrecognized tax benefits were $4.7 million. Management estimated a reasonably possible change over the next 12 months ranging from no change to a $1.0 million increase. Ordinary-course litigation and administrative proceedings were disclosed; management did not expect them to have a material adverse effect.
- Management stated that liquidity was adequate for foreseeable needs and that financial covenants were met. The filing also notes that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the revolving credit facility was renewed, replaced or otherwise addressed before its August 31, 2021 maturity.
- Whether driver availability, planned Q2 pay enhancements and freight rates translated into stronger loaded miles and revenue in subsequent periods.
- How much of the Q1 operating-ratio improvement was attributable to equipment-disposal gains versus underlying transportation operations.
- Whether the $85–$95 million remaining-2021 net capital expenditure outlook and $121.3 million equipment commitments were realized as planned.
- Subsequent developments in fuel and tire costs, deferred payroll-tax repayments, and uncertain tax positions.