Business context and reporting period
Heartland Express, Inc. is a short-to-medium-haul truckload carrier, primarily providing asset-based dry-van services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. Results include Interstate Distributor Co. (IDC) from its July 6, 2017 acquisition date; IDC contributed 33.0% of third-quarter revenue and 13.6% of nine-month revenue, limiting direct comparability with 2016.
Key financial metrics
Amounts are in millions, except per-share data and ratios.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $182.1 | $149.3 | $441.6 | $472.9 |
| Operating income | $13.0 | $19.9 | $53.7 | $64.7 |
| Net income | $7.9 | $12.5 | $36.6 | $43.3 |
| Diluted EPS | $0.09 | $0.15 | $0.44 | $0.52 |
| Operating ratio | 92.9% | 86.7% | 87.8% | 86.3% |
| Adjusted operating ratio, excluding fuel surcharge effects (non-GAAP) | 91.9% | 85.1% | 86.3% | 84.9% |
Third-quarter net margin was 4.3% versus 8.4%; nine-month net margin was 8.3% versus 9.2%. Nine-month operating cash flow was $77.2 million, down from $120.2 million, or 17.5% of revenue versus 25.4%. Investing cash outflow was $125.9 million, including $87.6 million net cash paid for IDC; financing cash outflow was $28.5 million, primarily the $23.3 million repayment of IDC debt and $5.0 million of dividends. Cash declined $77.2 million to $51.3 million.
At September 30, cash was $51.3 million, current assets $171.7 million, current liabilities $92.4 million, total assets $797.7 million, and stockholders’ equity $537.5 million. The company had no debt outstanding and $171.3 million available under its revolving credit facility, subject to a $3.7 million letter of credit. Restricted and designated cash and investments totaled $32.5 million and were not all available for general use. Dividends declared were $0.02 per share for the quarter and $0.06 year to date.
Material changes versus prior comparable periods
- Third-quarter revenue rose 22.0%, reflecting IDC and higher fuel-surcharge revenue, but net income fell 36.8%. Nine-month revenue declined 6.6% and net income declined 15.5%, as fewer miles and drivers in legacy operations outweighed partial-period IDC contributions.
- Operating ratios worsened in both comparisons. Management cited IDC integration costs and operating performance, labor and other variable expenses, and increased claims severity and frequency in the quarter. Higher fuel prices also affected costs; fuel cost per mile net of surcharges increased 5.5% year to date.
- Higher gains on equipment disposals partly offset operating pressure: $19.8 million year to date versus $7.3 million. The company estimated full-year 2017 equipment-sale gains of approximately $24–$26 million.
- IDC was acquired for $94.0 million in cash before approximately $6.3 million of acquired cash; preliminary purchase accounting recorded $32.0 million of goodwill. IDC’s purchase-price allocation remains subject to adjustment.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance was provided. Management said it was targeting a return to an operating ratio in the low 80s and expected operational improvements. Given IDC’s 105% year-to-date operating ratio before acquisition, management was focused on cost reductions and aimed to return IDC to profitability in Q4 2017.
- Management estimated 2017 net capital expenditures of approximately $45–$50 million and expected equipment sales to generate the gains noted above. It also cited an October 1 driver pay increase and expected salaries, wages and benefits to rise amid intense competition for qualified drivers.
- Fuel prices, driver availability and compensation, customer demand, competition, safety and insurance claims, and the successful integration of IDC are key risks. Fuel surcharges do not fully or immediately offset fuel increases; management estimated a $1-per-gallon year-over-year fuel increase could reduce 2017 pretax income by about $6.3 million under stated assumptions.
- Purchase commitments for tractors and trailers, net of tractor-sale commitments, totaled $101.1 million. Routine litigation and administrative matters were described as adequately provided for; the filing reported no tax litigation. Gross unrecognized tax benefits were $5.8 million, with a possible $1.3–$2.3 million decrease over the next 12 months, primarily from statute expirations.
- The company was in compliance with credit covenants; its $175 million revolving facility matures October 31, 2018. Management stated liquidity was adequate for foreseeable needs. Disclosure controls were deemed effective, but IDC was excluded from the internal-control assessment following its acquisition.
Important facts for investors to verify
- Whether IDC cost reductions and integration deliver the stated path to profitability and improve consolidated operating ratios.
- How much of revenue, earnings and cash-flow changes reflects IDC versus legacy operations, and whether reported equipment-sale gains are sustainable.
- Driver hiring and retention, the effect of the pay increase, and exposure to fuel prices not recovered through surcharges.
- Cash availability after restricted funds, equipment commitments and planned capital spending; also the credit facility’s renewal or replacement before its 2018 maturity.
- Final IDC purchase accounting, including goodwill and intangible valuations, and the related internal-control integration.