Heartland Express, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Heartland is a truckload carrier operating the Heartland Express, Millis Transfer, Smith Transport, and CFI brands, with dry-van, temperature-controlled, and Mexico cross-border/logistics services.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Operating revenue | $968.0 million | $607.3 million |
| Operating income | $188.4 million | $105.4 million |
| Net income | $133.6 million | $79.3 million |
| Diluted EPS | $1.69 | $1.00 |
| Operating ratio (GAAP) | 80.5% | 82.6% |
| Adjusted operating ratio (non-GAAP) | 84.8% | 79.7% |
| Operating cash flow | $194.7 million | $123.4 million |
Revenue rose 59.4%, primarily reflecting the acquisitions of Smith Transport (closed May 31, 2022) and CFI (closed August 31, 2022), which contributed only post-acquisition results to FY2022. Fuel surcharge revenue was $169.2 million, versus $76.1 million. Net margin was 13.8%, compared with 13.1%. GAAP operating income included a $73.2 million gain on the sale of a terminal; the non-GAAP adjusted operating ratio excludes that gain, fuel surcharge effects, acquisition-related costs, and intangible amortization. Accordingly, reported and adjusted trends diverged: the GAAP ratio improved, while the adjusted ratio worsened.
Fuel expense increased to $194.6 million from $99.6 million, reflecting higher fuel prices and acquired miles. The company reported $96.9 million in total gains on property and equipment disposals, including the terminal-sale gain. Depreciation and amortization was $133.0 million; management expects approximately $200–$210 million in 2023.
Liquidity, debt, and capital allocation
At December 31, 2022, total assets were $1.67 billion and stockholders’ equity was $855.5 million. Cash and cash equivalents were $49.5 million; cash, cash equivalents, and restricted cash totaled $64.5 million. Operating cash flow was $194.7 million. Investing activities used $663.3 million, mainly for $675.9 million of net acquisition cash outlays. Financing activities provided $359.3 million, primarily from debt issuance. Cash and cash equivalents decreased $108.3 million during the year.
Debt was $382.4 million, with an additional $30.6 million in finance lease liabilities. The company had $375.0 million outstanding under its term facility, no revolver borrowings, and $86.1 million of available revolving capacity. The weighted-average rate on Credit Facility borrowings was 5.6%; most of the term borrowing is variable-rate. Management says it intends to prioritize debt repayment while funding capital needs and maintaining regular quarterly dividends. It does not currently expect special dividends, share repurchases, or significant acquisitions while paying down debt.
Material changes and management outlook
- The Smith Transport and CFI acquisitions substantially expanded fleet, revenue, geographic reach, and service offerings, while introducing significant debt and integration demands. Management said the acquired operations had operating ratios in the 90s at acquisition and expects integration to improve performance toward its long-term low-80s operating-ratio objective.
- Freight demand softened in the second half of 2022. Management expected lower, challenged demand at least through the first half of 2023, while anticipating revenue growth primarily from the acquisitions, partly offset by weaker freight conditions. This is directional commentary, not quantified earnings guidance.
- Management expects higher 2023 net capital expenditures than in 2022 and expects average fleet age to remain broadly consistent, citing limited availability and high cost of new equipment.
- Driver availability, compensation, insurance premiums, maintenance costs, fuel-price volatility, and equipment supply remain important operating pressures. The company reported a 2.0-year average tractor age and 6.3-year average trailer age at year-end, both affected by acquired fleets.
Risks, contingencies, and unusual items
- Material risks include trucking-cycle and rate weakness, driver shortages and wage pressure, fuel costs not fully recovered through surcharges, customer concentration, acquisition integration, variable-rate debt, and equipment resale values. The five largest customers generated approximately 27% of 2022 revenue; no single customer exceeded 10%.
- Heartland self-insures significant portions of auto liability, cargo, property damage, and workers’ compensation claims. Reserve estimates are uncertain; auto-liability claims reserves were identified by the auditor as a critical audit matter.
- Other exposures include changing labor and independent-contractor rules, environmental and emissions regulation, litigation and accident claims, cybersecurity and technology interruptions, and weather or other disruptions. The filing describes ordinary-course litigation and says management believes pending exposure is adequately provided for.
- The $73.2 million terminal-sale gain was a significant nonrecurring item. The acquisitions also generated $2.3 million of acquisition-related costs and increased goodwill to $320.7 million and other intangible assets to $103.7 million.
- The auditor issued unqualified opinions on the financial statements and internal controls. Management and the auditor excluded the recently acquired Smith Transport and CFI businesses from the 2022 internal-control assessment; the auditor noted those businesses represented 55.3% of consolidated assets and 34.9% of revenue for the year, so their controls were not covered by that opinion.
Important facts for investors to verify
- Acquisition-related revenue, earnings, cash flows, and integration progress; reported FY2022 results include only partial-year ownership of Smith Transport and CFI.
- Underlying operating performance excluding the terminal-sale gain and other non-GAAP adjustments, including whether adjusted operating ratio improves from 84.8%.
- Debt paydown pace, variable-rate interest exposure, covenant headroom, and available liquidity as capital expenditures and integration needs continue.
- 2023 freight demand, rates, driver availability and compensation, fuel surcharge recovery, and equipment costs and resale values.
- Development of self-insured claims reserves and the integration of acquired companies’ financial reporting controls.