Heartland Express, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Heartland is a short-to-medium-haul, primarily asset-based dry-van truckload carrier. It exited non-asset-based freight brokerage in Q1 2017.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Operating revenue | $129.6m | $160.8m | $259.5m | $323.6m |
| Operating income | $21.3m | $24.5m | $40.7m | $44.8m |
| Net income | $14.6m | $16.4m | $28.7m | $30.7m |
| Diluted EPS | $0.18 | $0.20 | $0.34 | $0.37 |
| Operating ratio | 83.6% | 84.8% | 84.3% | 86.2% |
| Adjusted operating ratio (non-GAAP) | 81.4% | 83.2% | 82.3% | 84.8% |
For H1, reported net margin was 11.0%, compared with 9.5% a year earlier. The filing attributes improved operating ratios to lower costs and higher gains on equipment disposals, despite reduced revenue.
- Cash flow: H1 operating cash flow was $50.8m, down from $77.9m; net investing cash use was $4.6m and financing cash use was $3.5m. Cash increased $42.8m to $171.3m.
- Liquidity and debt: At June 30, the company had no long-term debt, $171.3m cash, and $171.3m available on its revolving credit facility after letters of credit. It reported compliance with credit covenants.
- Balance sheet: Total assets were $751.1m and stockholders’ equity $531.3m at June 30. Current assets were $252.4m versus current liabilities of $62.3m.
- Capital returns and investment: H1 dividends paid were $3.3m; no shares were repurchased. Net capital expenditures for 2017 were estimated at $40m–$50m. Equipment purchase commitments, net of tractor sale commitments, were $63.6m at June 30.
Changes and management commentary
Revenue fell 19.4% in Q2 and 19.8% in H1 year over year. Management cited fewer drivers and lower loaded miles; H1 trucking revenue also reflected slower freight demand, partly offset by a higher rate per loaded mile. Management said driver competition had intensified and attracting and retaining qualified drivers had become more difficult. Fuel prices were higher year over year, and fuel surcharges do not recover all fuel costs, including costs associated with empty or out-of-route miles and idling.
H1 gains on equipment disposals rose to $12.4m from $5.8m, including higher gains from trailer sales. Management estimated full-year 2017 equipment-disposal gains of approximately $24m–$28m. The company reported a 1.9-year average tractor age and a 4.3-year average trailer age at June 30.
Outlook, material events, and risks
- No specific earnings or revenue guidance was provided. Management said it believed liquidity was adequate for foreseeable needs and expected to fund longer-term capital needs from operations, used-equipment sales, and credit availability.
- On July 6, 2017, after the reporting period, Heartland acquired Interstate Distributor Co. (IDC). Stated enterprise value was approximately $113m, including about $94m cash for equity, $23m assumed debt, and $4m acquired cash. The initial acquisition accounting and pro forma information were not complete at filing. Immediately after the acquisition, Heartland reported approximately $81m available cash and expected to repay the assumed debt in Q3 2017.
- Management cited general trucking-market and regulatory risks, fuel-price exposure, driver availability and compensation, customer concentration, self-insured claims, and the risk that IDC integration may not deliver expected benefits. A $1-per-gallon increase in fuel prices was estimated to reduce 2017 pretax income by about $6.3m under stated assumptions.
- Routine litigation and administrative proceedings were disclosed; management said potential exposure was adequately provided for. The filing also reported $5.9m of gross unrecognized tax benefits and said those amounts could change as audits and statutes of limitation resolve.
Important facts for investors to verify
- Whether driver availability, loaded miles, and freight demand recover, and how these affect revenue and utilization.
- How much operating performance depends on equipment-sale gains versus recurring transportation operations.
- IDC’s final purchase accounting, assumed-debt repayment, integration costs, and contribution to results.
- Whether operating cash flow and capital spending support dividends and fleet investment while maintaining liquidity.
- Developments in fuel costs, self-insurance claims, and uncertain tax positions.