Rocky roads steadied by Hearthland Express’ solid balance sheet

US-based Hearthland Express is trying to react to the severe downturn for short-to-medium haul truckload carrier services providers in the country.

A recessionary environment has hit the domestic freight industry, but Hearthland Express has all it takes to thrive – it won’t be easy, however.

Its latest quarterly trading update released on 10 May showed how the group trimmed costs in order to offset falling revenues. However, sales are plunging more quickly than costs, yielding a significantly higher operating ratio year-on-year.

Its top-line plunged 13% to $163m in the first quarter, partly due to lower fuel surcharge revenues. Even excluding fuel surcharge revenues, they dropped 7.3%.

Its operating margins were under pressure, down more than 200 basis points year-on-year.

Salaries, wages and benefits are on their way down, as are many of its operating expenses, with fuel-related costs falling the most. Nonetheless, operating income dropped 28.5% to $20m, while earnings per share plunged to $0.17 from $0.20 despite a lower share count in the period.

That said, its balance sheet is rock-solid, and cash flows are sound.

Despite challenging trading conditions, operating cash flow was mildly higher year-on-year at $55.9m, while cash and cash equivalents stood at $69.7m, up from $33.2m one year earlier.

Good working capital management contributed to steady operating cash flows, while the amount of negative cash flow from investment is so low it doesn’t harm its very healthy, projected free cash flow yield (between 8% and 10%), although capital expenditures are expected to rise, ranging between $45m and $55m this year.

Additionally, the group noted that cash used in financing activities stood at $16.3m in the first quarter, compared to $24.6m one year earlier, “a decrease of $8.3m due mainly to $14.7m used for repurchases of common stock and $1.7m paid for dividends during 2016 compared (to) $24.6m cash used for repayments of borrowings on the credit agreement during 2015”.

It has funds to entertain shareholder-friendly activity – spanning buybacks, special dividends and acquisitions – but it seems likely that management would err on the side of caution, at least in the near future.

Although there were no outstanding borrowings during the three months ended 31 March, it has prompt access to liquidity, given that it signed a $250m five-year unsecured revolving credit facility with a group of banks in November 2013 – this remains its core credit facility, but was amended and cut to $200m on 1 November 2015, and is expected to drop to $175m from 1 November 2016. The revolver is available for working capital, equipment financing, and general corporate purposes.

With a market cap of $1.5bn, the group provides nationwide truckload services for major shippers. Its stock is up 7.4% so far this year, one month ahead of second-quarter results, which are due on 19 July. It has fallen 18.2% since mid-June 2014.

Source: Transport Intelligence, June 21, 2016

Author: Alessandro Pasetti