Heartland Express, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2019, compared with Q1 2018. Heartland is a short-to-medium-haul truckload carrier, primarily providing asset-based dry-van services across the United States, with a single reportable operating segment.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenue | $139.5 million | $156.7 million |
| Operating income | $20.8 million | $12.9 million |
| Net income | $17.3 million | $13.4 million |
| Diluted EPS | $0.21 | $0.16 |
| Operating ratio | 85.1% | 91.7% |
| Adjusted operating ratio, excluding fuel surcharge revenue (non-GAAP) | 83.0% | 90.4% |
| Cash provided by operating activities | $35.8 million | $32.2 million |
Revenue declined 11.0%, while net income increased 29.5%. The effective tax rate was 21.2%, versus (0.7)% in Q1 2018; the filing attributes the difference principally to larger favorable tax-return provision adjustments in the prior-year quarter. Dividends declared were $0.02 per share in both periods.
Cash, debt, and liquidity
- At March 31, 2019, cash and cash equivalents were $176.3 million; cash, cash equivalents, and restricted cash totaled $196.5 million. Restricted and designated cash of $20.2 million was not available for general business use.
- The company had no debt outstanding and $89.3 million available under its $100 million revolving credit facility, after $10.7 million of letters of credit. The facility matures August 31, 2021; the company reported compliance with its financial covenants.
- Investing activities used $20.5 million, including $34.2 million of net property and equipment purchases, partly offset by $13.8 million of equipment-sale proceeds. Financing activities used $1.7 million, primarily for dividends. Cash, cash equivalents, and restricted cash increased $13.6 million.
- Management estimated 2019 net capital expenditures of approximately $80–$100 million. Estimated purchase commitments for tractors, trailers, and an exercised terminal purchase option totaled $82.5 million at quarter-end.
Material changes and management commentary
- Management said lower freight demand than in 2018 and more severe winter weather reduced volumes. Lower miles driven were partly offset by higher rates per mile, although rates were not at 2018 levels.
- Operating revenue fell $17.2 million: trucking and accessorial revenue declined $12.7 million, and fuel surcharge revenue declined $4.5 million to $17.0 million. Average DOE diesel prices were $3.02 per gallon in both comparison periods.
- Operating expenses fell to $118.7 million from $143.7 million. Lower salaries, fuel, rent and purchased transportation, and depreciation reflected fewer drivers and miles, reduced equipment leasing, and a smaller fleet. Insurance and claims expense increased 13.4%, which management attributed to greater claim frequency and severity.
- Gains on equipment disposals were $3.8 million, versus $2.9 million. Management estimated total 2019 equipment-sale gains of $28–$33 million, subject to the timing of transactions and used-equipment prices.
- Management cited driver shortages and attrition as ongoing constraints on growth and said driver compensation could remain inflationary. The company had made two driver-pay increases in the preceding two years.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management said it expected driver hiring and retention challenges to continue through the remainder of 2019, and expected lower depreciation expense for the rest of 2019 than in 2018.
- Fuel surcharge arrangements do not fully offset fuel costs on empty, out-of-route, or idling miles, and recovery can lag price increases. The filing estimates that a $1.00-per-gallon year-over-year fuel-price increase would reduce 2019 pretax income by approximately $5.6 million, assuming 2018 operating factors; a 10% tire-price increase would raise tire expense by $1.5 million.
- Unrecognized tax benefits were $4.5 million at March 31, 2019. Management estimated a reasonably possible increase of approximately $0.1–$1.1 million over the next 12 months. Routine litigation and administrative proceedings were described as incidental to the business, with exposure considered adequately provided for.
- The company adopted the new lease accounting guidance on January 1, 2019; management said the effect was not material. No subsequent events requiring disclosure were reported. Disclosure controls were assessed as effective, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether freight volumes, rates, and driver availability improve or weaken after the quarter, given management’s comments on demand, weather, and attrition.
- Whether operating-margin improvement is sustainable without relying on equipment-sale gains, and whether insurance and claims costs remain elevated.
- Actual 2019 capital expenditures and equipment-sale proceeds and gains versus management’s estimates.
- Cash available for general use after restricted funds and purchase commitments, and continued compliance with credit-facility covenants.
- Resolution and potential financial impact of uncertain tax positions, litigation, and other contingencies.