Heartland Express, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Heartland is a truckload carrier providing dry-van, temperature-controlled, brokerage and dedicated services in the U.S. and parts of Canada. Results include Gordon Trucking, Inc. (GTI), acquired November 11, 2013; the prior-year quarter does not include GTI and is not directly comparable.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Operating revenue | $224.5 million | $134.3 million |
| Operating income | $20.7 million | $30.2 million |
| Net income | $14.1 million | $19.7 million |
| Diluted EPS | $0.16 | $0.23 |
| Operating ratio | 90.8% | 77.5% |
| Net margin | 6.3% | 14.7% |
| Cash provided by operations | $32.0 million | $28.5 million |
Revenue rose 67.2%, including fuel surcharges of $45.9 million versus $28.0 million. Line-haul and other revenue increased 68.0%, primarily with higher loaded miles. Net income fell 28.7%; management attributed the weaker operating performance to the factors below. The prior-year quarter included $11.2 million in equipment-sale gains versus $2.0 million in Q1 2014, a significant comparison effect.
- Operating expenses were $203.8 million. Salaries, wages and benefits were 31.6% of revenue, fuel 28.2%, and depreciation and amortization 10.9%.
- Cash from operations equaled 14.3% of revenue, compared with 21.2% a year earlier. Investing used $19.8 million, including $21.6 million of property and equipment purchases and a $3.0 million GTI working-capital settlement. Financing used $13.0 million for net revolver repayments. Cash declined $0.8 million to $16.9 million.
- At March 31, total assets were $723.7 million and stockholders’ equity was $410.2 million. Long-term debt was $62.0 million, down from $75.0 million at year-end 2013. The $250 million unsecured revolver had $182.5 million available; outstanding letters of credit were $5.5 million. The company reported compliance with its financial covenants.
- The declared quarterly dividend was $0.02 per share. No shares were repurchased during the quarter.
Changes, outlook and management commentary
- Severe winter weather across the eastern U.S. negatively affected fleet utilization and operating results.
- Operating revenue increased substantially with GTI included and higher miles, while expenses also increased. Management said late 2013 and early 2014 showed increasing freight demand and decreasing industry capacity, but it could not predict whether the trend would continue.
- Management cited increasingly difficult recruitment and retention of qualified drivers. Fuel prices were relatively stable; the company said surcharges do not recover all fuel costs, including costs from empty and out-of-route miles and idling.
- Management estimated 2014 net capital expenditures on revenue equipment of approximately $115 million to $125 million. It anticipated equipment-sale activity to increase from Q1 and full-year equipment-sale gains to be slightly below 2013.
- Management said liquidity was adequate for foreseeable needs, with cash and available revolver capacity supporting capital requirements. It identified operating cash flow, used-equipment sales and the credit line as funding sources.
- Effective July 1, 2013, the company returned tractor depreciation from the 150% to the 125% declining-balance method. This reduced Q1 2014 depreciation and increased operating income by $1.4 million, or $0.01 per share after tax.
Risks, contingencies and unusual items
- The company has ordinary-course litigation, primarily transportation-related injury, property, cargo and workers’ compensation claims; management considers recorded provisions adequate.
- Estimated 2014–2015 tractor and trailer purchase commitments, net of tractor sale commitments and including equipment received but unpaid, totaled $124.5 million at March 31.
- Gross unrecognized tax benefits were $12.9 million, with $6.0 million of accrued interest and penalties. Management estimated a possible $0.3 million to $1.3 million decrease in gross unrecognized tax benefits over the next 12 months, mainly from statute expirations.
- Related-party leases and transactions include equipment and terminal rentals. Q1 related-party rent was $2.8 million, comprising $1.8 million for revenue equipment and $1.0 million for terminals. The company also purchased tractors, parts and services from a dealership owned by a board member and certain employees.
- On May 8, 2014, the company completed a $2.8 million purchase of its Lathrop, California terminal from a related-party entity.
- Key disclosed risks include economic and freight-rate conditions, dependence on major customers, driver availability, fuel and equipment costs, regulation, weather, insurance claims, and integration of GTI.
Important facts for investors to verify
- How much of the revenue increase and operating performance reflects GTI versus organic changes in miles, rates and mix.
- Whether winter-weather effects, driver constraints and freight-market tightening persist, and how they affect utilization, pricing and margins.
- Delivery of the $115 million to $125 million 2014 equipment-capex outlook, used-equipment proceeds and related cash-flow needs.
- Progress integrating GTI, including related-party leasing and purchasing arrangements, and any further purchase-price or working-capital adjustments.
- Changes in revolver borrowings, covenant headroom, interest-rate exposure and resolution of uncertain tax positions.