Business context and reporting period
Heartland Express, Inc. (NASDAQ: HTLD) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. It is a short-to-medium-haul truckload carrier, primarily providing asset-based dry-van transportation. Results include Millis Transfer only from its August 26, 2019 acquisition date.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $147.9 | $151.3 | $429.6 | $463.8 |
| Operating income | $26.7 | $25.1 | $76.6 | $60.2 |
| Net income | $20.5 | $19.1 | $60.2 | $50.2 |
| Diluted EPS | $0.25 | $0.23 | $0.73 | $0.61 |
| Operating ratio | 81.9% | 83.4% | 82.2% | 87.0% |
| Adjusted operating ratio (non-GAAP) | 79.4% | 80.7% | 79.6% | 84.9% |
Q3 net margin was 13.9%, versus 12.6%; nine-month net margin was 14.0%, versus 10.8%. Adjusted operating ratio excludes fuel-surcharge revenue and is a non-GAAP measure; the company cautions it is supplemental and not a substitute for GAAP results.
- Cash flow: Nine-month operating cash flow was $109.4 million, versus $108.6 million. Investing activities used $116.3 million, including $62.1 million for the acquisition; financing activities used $45.2 million, including $39.9 million of acquired-debt repayments and $4.9 million of dividends. Cash, cash equivalents, and restricted cash declined $52.2 million to $130.8 million; cash and cash equivalents excluding restricted cash were $111.9 million.
- Liquidity and debt: At September 30, the company had $53.5 million of Millis-related equipment debt and $88.7 million of available capacity on its $100 million revolving credit facility. Subsequent to quarter-end, it repaid another $32.4 million, leaving $21.1 million of acquired debt outstanding. Management expected to repay the remainder before December 31, 2019. The company reported compliance with credit covenants.
- Balance sheet: Total assets were $949.0 million, compared with $806.2 million at December 31, 2018; stockholders’ equity was $673.1 million. The company reported $18.8 million of restricted and designated cash and investments.
Material changes and notable items
- Nine-month revenue fell 7.4%, primarily from lower miles and reduced fuel-surcharge revenue; freight demand was weaker than in 2018, while freight rates per mile remained higher year over year. Q3 revenue declined 2.2%.
- Nine-month net income rose 19.8%, and the operating ratio improved 4.8 percentage points. Lower fuel and rent/purchased-transportation costs and higher gains on equipment sales contributed; higher driver compensation and the acquisition also affected expenses.
- Millis Transfer was acquired for total consideration of $156.2 million, including cash, restricted company shares, and assumed debt. It contributed 10.6% of Q3 revenue and 3.6% of nine-month revenue, and represented 19.6% of period-end assets. The purchase-price allocation remained subject to adjustment.
- Gains on equipment disposals were $24.0 million for nine months, versus $15.4 million. Management estimated full-year 2019 gains of $30–$33 million, subject to transaction timing and used-equipment prices.
Outlook, risks, and contingencies
No formal earnings or revenue guidance is provided. Management estimated fourth-quarter 2019 net capital expenditures of approximately $35–$45 million and expected fourth-quarter depreciation to be higher than Q3 because of a full quarter of depreciation on the acquired fleet. It stated that liquidity was adequate for foreseeable needs.
Management cited lower freight demand and excess truckload capacity, a challenging driver-hiring market, driver-pay inflation, and fuel-price exposure. Fuel surcharges may not fully or promptly recover fuel costs, particularly for empty, out-of-route, and idling miles. The company estimated that a $1-per-gallon increase in fuel prices would reduce 2019 pretax income by about $5.6 million under stated assumptions; a 10% tire-price increase would add $1.5 million to tire expense. Ordinary-course litigation and administrative matters were described as adequately provided for, with no expected material adverse effect. Management estimated gross unrecognized tax benefits could increase by $0.2–$1.2 million over the next twelve months. Disclosure controls were deemed effective; acquired Millis internal controls were expected to be excluded from the 2019 internal-control assessment.
Important facts for investors to verify
- Whether Millis integration achieves management’s stated path toward a low-80s operating ratio, and how acquisition-related results affect comparisons.
- Actual repayment of the remaining Millis debt, post-acquisition liquidity, and progress against capital-spending estimates.
- Whether used-equipment sale gains and the estimated $30–$33 million full-year total are sustainable or materially timing-dependent.
- Freight volumes, rates, driver availability and compensation, fuel-surcharge recovery, and insurance-claim trends.
- Final purchase accounting for Millis and changes in uncertain tax positions or other contingencies.