Heartland Express, Inc. — Q3 2018 Form 10-Q
Business context and period: Quarterly report for the three and nine months ended September 30, 2018. Heartland is a short- to medium-haul truckload carrier, primarily providing asset-based dry-van transportation. Comparisons are affected by the July 2017 acquisition of Interstate Distributor Co. (IDC): 2018 includes IDC for the full periods, while 2017 includes it only from July 6 onward.
Financial performance
- Third quarter: Revenue was $151.3 million, down 16.9% year over year; operating income was $25.1 million versus $13.0 million; net income was $19.1 million versus $7.9 million. Diluted EPS was $0.23 versus $0.09.
- First nine months: Revenue was $463.8 million, up 5.0%; operating income was $60.2 million versus $53.7 million; net income was $50.2 million versus $36.6 million. Diluted EPS was $0.61 versus $0.44.
- Operating ratios: Q3 GAAP operating ratio was 83.4% versus 92.9%; adjusted operating ratio, a non-GAAP measure, was 80.7% versus 91.9%. Nine-month figures were 87.0% versus 87.8% and 84.9% versus 86.3%, respectively. The filing attributes improvement to IDC integration, fleet and cost reductions, and a favorable rate environment.
- Cash flow: Nine-month operating cash flow was $108.6 million versus $77.2 million. Investing activities used $42.1 million, including $127.5 million of equipment purchases and $84.9 million of sale proceeds. Financing activities used $30.2 million, mainly for $25.1 million of share repurchases and $5.0 million of dividends.
- Liquidity and debt: September 30 cash and cash equivalents were $120.0 million; cash, cash equivalents, and restricted cash totaled $142.5 million. The company had no debt and $90.8 million of available borrowing capacity under its amended $100 million revolving facility, extended to August 2021. It reported covenant compliance.
- Balance sheet and returns: Total assets were $813.5 million and stockholders’ equity was $595.0 million. The company repurchased 1.4 million shares during the nine months. Dividends declared were $0.06 per share.
Material changes, outlook, and risks
- Q3 revenue fell as miles driven declined 26.3%, reflecting fleet right-sizing, removal of less-profitable customer relationships, and the exit from brokerage; higher rates per loaded mile partly offset the decline. Nine-month revenue growth was driven in part by higher fuel surcharge revenue, up 28.8%.
- Management reported driver availability and retention as ongoing challenges, with competition and driver pay costs increasing. Driver pay increases took effect in October 2017 and July 2018. Fuel prices were higher year over year, and surcharge recovery may not fully or promptly offset fuel costs.
- Management estimated 2018 net capital expenditures of approximately $45–$50 million and anticipated 2018 equipment-sale gains of $24–$25 million; the filing cautions that gains depend on transaction timing and used-equipment prices. Management expected continued reduction of equipment lease obligations and a return to a more historically owned-asset fleet, which could increase depreciation.
- The amended credit facility provides an optional, bank-approved accordion of up to $100 million. Potential sensitivities disclosed include an estimated $6.3 million reduction in 2018 pretax income from a $1-per-gallon fuel-price increase and a $1.5 million reduction from a 10% tire-price increase, based on stated assumptions.
- Management said routine litigation exposure was adequately provided for. Equipment purchase commitments, net of tractor sale commitments, totaled $86.2 million. Unrecognized tax benefits were $4.3 million; management estimated a possible $0.2–$0.8 million decrease over the next 12 months.
- Controls: Disclosure controls were not effective at quarter-end because of previously reported material weaknesses in internal control over financial reporting. Remediation was ongoing; management expected the weaknesses to be fully addressed by year-end if controls operated effectively through December 31, 2018.
Important facts for investors to verify
- Whether fleet reductions and IDC integration can sustain improved operating ratios despite lower miles and ongoing driver constraints.
- How much revenue and margin depend on rate increases, fuel surcharges, and used-equipment sale gains.
- Actual 2018 capital spending, equipment gains, and the transition toward an owned-asset fleet.
- Progress and effectiveness of remediation of the disclosed internal-control material weaknesses.
- Current liquidity, credit-facility availability, equipment commitments, and resolution of uncertain tax positions.