Heartland Express, Inc. — Q1 2020 Form 10-Q
Business context and period: Results cover the three months ended March 31, 2020. Heartland is a short- and medium-haul truckload carrier, primarily providing asset-based dry-van services. Q1 2020 includes Millis Transfer, acquired in August 2019; Q1 2019 does not, limiting direct comparability. The company reports one operating segment.
Financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $166.3 million | $139.5 million |
| Operating income | $17.3 million | $20.8 million |
| Net income | $13.2 million | $17.3 million |
| Diluted EPS | $0.16 | $0.21 |
| Operating ratio | 89.6% | 85.1% |
| Adjusted operating ratio, non-GAAP | 88.2% | 83.0% |
| Operating cash flow | $40.1 million | $35.8 million |
Revenue rose 19.2%, while net income fell 23.6%. Net margin was 8.0%, versus 12.4% a year earlier. The higher operating ratios indicate weaker operating efficiency; the non-GAAP adjusted ratio excludes fuel surcharge revenue and is not a GAAP measure.
Cash used in investing was $39.6 million, primarily reflecting equipment and other property purchases; cash used in financing was $14.1 million, including $12.3 million of share repurchases and $1.6 million of dividends. Cash, cash equivalents and restricted cash declined $13.7 million to $82.4 million; unrestricted cash and cash equivalents were $64.2 million.
At quarter-end, total assets were $913.3 million and stockholders’ equity was $684.7 million. The company had no debt, $89.7 million available under its $100 million revolving credit facility after letters of credit, and was in compliance with its covenants. Current assets were $149.3 million and current liabilities were $71.7 million.
Changes and management commentary
- Revenue growth primarily reflected additional miles from Millis, partly offset by lower freight rates. Salaries, wages and benefits increased 30.6%, largely due to Millis; depreciation and amortization rose 19.8% for the same principal reason.
- The year-over-year earnings decline was attributed primarily to lower gains on equipment disposals: Q1 2020 recorded a $0.2 million loss versus a $3.8 million gain in Q1 2019. Management expects $10–$12 million of disposal gains, primarily in Q3 and Q4 2020.
- Management described freight demand as softening in the first two months of 2020, with increased demand in March amid COVID-19. The outlook for freight demand over the following months was uncertain; the filing gives no specific earnings or revenue guidance.
- Management expected approximately $85–$95 million of net capital expenditures during the remainder of 2020. Equipment purchase commitments at March 31 totaled $84.1 million, extending into 2021.
- Insurance and claims expense increased 11.8%; management expected insurance premium expense for the remainder of 2020 to be higher than in the prior three quarters and Q1 2020, citing Millis and higher renewal rates.
Risks, contingencies and unusual items
- COVID-19 could materially affect demand, operations, staffing, liquidity and results; the extent and duration of the impact were uncertain. Management said it was still evaluating the CARES Act and did not then expect a material financial-statement impact.
- Fuel surcharge agreements do not fully offset fuel costs, including costs from empty and out-of-route miles, idling and recovery timing. The company estimated that a $1.00-per-gallon year-over-year fuel price increase would reduce 2020 pretax income by approximately $7.2 million, assuming specified operating factors remained at 2019 levels. A 10% increase in tire prices was estimated to raise tire expense by $1.3 million.
- Routine litigation and administrative claims were described as adequately provided for; management did not expect pending matters to have a material adverse effect. The company carries insurance above self-insured retentions.
- Gross unrecognized tax benefits were $4.9 million. Management estimated no change to an increase of $1.0 million as a reasonably possible change over the next 12 months.
- The company had $6.2 million of shares remaining authorized for repurchase at quarter-end. Repurchases are discretionary and may continue depending on market conditions, cash needs and other factors.
Key facts for investors to verify
- How much of reported revenue growth and expense growth reflects Millis versus changes in freight rates, miles and underlying operations.
- Whether the anticipated $10–$12 million of equipment-disposal gains and $85–$95 million of remaining-2020 net capital expenditures were subsequently realized.
- How COVID-19 affected freight demand, rates, driver availability, operations and liquidity after March 31, 2020.
- Whether insurance costs, claims and fuel-price exposure developed as management expected, and whether share repurchases continued.
- Subsequent resolution of uncertain tax positions and any changes in credit-facility availability or compliance.