Heartland Express, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; compared with Q1 2014 unless otherwise noted. Heartland is a short-to-medium-haul truckload carrier, operating primarily in asset-based dry-van transportation. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Operating revenue | $187.5 | $224.5 |
| Operating income | $28.3 | $20.7 |
| Net income | $17.6 | $14.1 |
| Diluted EPS | $0.20 | $0.16 |
| Operating ratio | 84.9% | 90.8% |
| Net margin | 9.4% | 6.3% |
| Operating cash flow | $55.7 | $32.0 |
Revenue fell 16.5%, including a 43.2% decline in fuel-surcharge revenue and a 9.6% decline in trucking revenue. Trucking revenue was affected by fewer loaded miles as driver availability declined, partly offset by higher revenue per loaded mile. Lower fuel prices and fewer miles reduced fuel expense; fuel was 18.3% of revenue versus 28.2% a year earlier. Salaries, wages, and benefits were nearly flat in dollars but rose to 37.9% of revenue from 31.6%, reflecting lower revenue and higher driver compensation. The effective tax rate increased to 37.7% from 31.6%.
Cash, debt, and liquidity
Cash and cash equivalents were $52.2 at March 31, 2015, up from $17.3 at year-end. Operating cash flow was $55.7; investing activities provided $3.8, including $25.5 of equipment-sale proceeds and $5.2 of equipment purchases, while financing activities used $24.6 to repay line-of-credit borrowings. The company ended the quarter with no debt and reported $220.6 of available revolver capacity, including the effect of outstanding letters of credit. It was in compliance with credit covenants.
Total assets were $780.5 and stockholders’ equity was $492.7. Restricted and designated cash and investments totaled $29.2, held in other current and non-current assets and unavailable for general business use. Dividends declared were $0.02 per share. Management said liquidity was adequate for foreseeable needs.
Outlook, risks, and unusual items
- Management expected rate-per-loaded-mile trends to benefit from tight industry capacity, but could not predict how long favorable market conditions would last. It anticipated driver-wage costs as a percentage of revenue and depreciation expense to increase during 2015 as it upgraded equipment.
- Driver recruitment and retention remain challenging. The company reported average driver pay about 13% higher in Q1 2015 than Q1 2014 following compensation changes effective in late 2014 and improved detention pay in January 2015.
- Management anticipated fuel prices would rise during 2015. Fuel surcharges do not fully recover fuel costs on empty, out-of-route, or idling miles. The filing estimates a $1.00 year-over-year increase in average fuel prices would reduce earnings by approximately $7.9; a 10% tire-price increase would raise tire expense by $1.4.
- Gain on disposal of property and equipment increased to $10.2 from $2.0 and contributed materially to the improvement in operating income and operating ratio. Management expected equipment sales to continue as it refreshed its fleet.
- Expected 2015 net capital expenditures were approximately $80–$90. Equipment purchase commitments, net of tractor sale commitments, were $72.3 for the remainder of 2015. Estimated net capex could rise if expected trailer sales are canceled.
- State tax positions included $12.1 of gross unrecognized tax benefits at quarter-end; management estimated a possible $1–$2 decrease over the next 12 months, mainly from statute expirations. Routine litigation was described as adequately provided for; the filing reports no tax litigation.
- Related-party transactions included equipment purchases and sales and equipment and terminal leases involving entities associated with a board member and certain employees. The filing also identifies driver availability, fuel and equipment costs, customer concentration, regulation, self-insurance, and seasonality among business risks. No specific earnings or revenue guidance was provided.
Key facts for investors to verify
- How much of the earnings and margin improvement is sustainable apart from the unusually larger equipment-disposal gain?
- Whether higher rates and available driver capacity can offset driver-pay inflation and fewer loaded miles.
- Whether fuel-price increases, equipment purchases, and planned fleet upgrades affect cash generation and capital needs as anticipated.
- Whether the $220.6 of revolver availability and $52.2 cash balance remain adequate after considering restricted/designated funds and equipment commitments.
- Developments in uncertain state tax positions, self-insurance claims, routine litigation, and related-party transactions.