Heartland Express, Inc. — Q3 2015 Form 10-Q
Business and period: Short-to-medium-haul truckload carrier, primarily asset-based dry van, reporting the three and nine months ended September 30, 2015. Results are unaudited; amounts below are in millions except per-share data.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $182.5 | $217.1 | $561.7 | $668.4 |
| Operating income | $24.9 | $36.3 | $88.9 | $97.6 |
| Net income | $15.1 | $22.7 | $56.0 | $63.3 |
| Diluted EPS | $0.17 | $0.26 | $0.64 | $0.72 |
| Operating ratio | 86.4% | 83.3% | 84.2% | 85.4% |
| Net margin | 8.3% | 10.5% | 10.0% | 9.5% |
- Q3 revenue declined 15.9% and net income fell 33.5%. Nine-month revenue declined 16.0% and net income fell 11.5%.
- Revenue included fuel surcharges: these fell 48.2% in Q3 and 45.2% for the nine months, largely reflecting lower diesel prices and fewer miles. Trucking and other revenue also declined as loaded miles and driver availability decreased, partially offset by higher rates per loaded mile.
- Lower fuel expense supported results, but driver compensation, insurance and claims, and depreciation pressures weighed on margins. Nine-month operating ratio improved year over year despite the revenue and earnings declines.
- Gains on sales of property and equipment were $7.4 million in Q3 and $27.3 million for the nine months, a material contribution to operating results.
- Nine-month cash from operations was $142.9 million, versus $129.0 million. Investing cash use was $33.6 million and financing cash use was $62.5 million. Cash increased $46.9 million to $64.2 million.
- At September 30, cash was $64.2 million; current assets were $185.2 million and current liabilities $85.5 million. Long-term debt was zero. The company had $220.6 million of unused revolver capacity, net of $4.4 million in outstanding letters of credit, and was in compliance with its covenants.
- Total assets were $767.5 million. The company repurchased 1.8 million shares during the first nine months for approximately $35.8 million and declared dividends of $0.06 per share. After quarter-end it repurchased another 0.9 million shares for $18.4 million.
Management outlook, risks and unusual items
- No formal earnings or revenue guidance was provided. Management expected rate-per-loaded-mile increases to continue, but at a slower pace, and said driver wages as a share of revenue could continue rising. Freight demand had softened in recent months; driver shortages and intensified competition for qualified drivers remained concerns.
- Management estimated 2015 net capital expenditures of $65–$70 million and 2016 net capital expenditures of $35–$45 million. Equipment purchase commitments were $58.3 million through the remainder of 2015 and 2016. Additional related-party terminal purchase options of $17.5 million were expected to close by year-end 2015.
- Fuel prices were substantially below 2014 levels, but management could not predict whether they would remain low. The filing estimates a $1.00 per-gallon annual fuel-price increase would reduce earnings by about $7.3 million under stated assumptions; a 10% tire-price increase would add $1.3 million in expense.
- Insurance and claims expense increased, which management attributed to greater claim severity and frequency. The company self-insures a significant portion of claims exposure. Other disclosed risks include driver recruitment and retention, economic and freight-demand conditions, customer concentration, regulation, equipment costs and values, and acquisition integration.
- Gross unrecognized tax benefits were $11.3 million; management estimated a possible $1.7–$2.7 million decrease over the next twelve months, mainly from statute expirations. Routine litigation was disclosed, with management stating that pending exposure was adequately provided for.
- Transactions with related parties included equipment purchases and sales, leases, and terminal property purchases. The filing also notes the purchase of one leased terminal for $4.9 million during the period and options exercised on three more locations.
Most important facts for investors to verify
- Whether freight demand, loaded miles, driver availability, and rate-per-mile trends recover or weaken further.
- How much reported earnings depend on equipment-sale gains, and whether those gains are sustainable as fleet upgrades continue.
- Whether higher driver pay, insurance claims, and depreciation continue to pressure operating costs and margins.
- Actual capital spending, equipment-sale proceeds, related-party terminal closings, and resulting cash and borrowing capacity.
- The pace and price of post-quarter share repurchases, and any resolution of the disclosed uncertain tax positions.