Heartland Express’ acquisitions change earnings complexion in Q3

Truckload carrier Heartland Express reported results for the first time since making a deal to double its size.

Heartland (NASDAQ: HTLD) reported Wednesday headline earnings per share of 31 cents for the third quarter, a penny better than the consensus estimate and level with the year-ago quarter. However, the number included a 2-cent negative impact tied to acquisition and other nonrecurring expenses. Gains on sale were more than $8 million lower year over year (y/y), which was an 8-cent drag compared to the 2021 third quarter.

Recent acquisitions lifted results, but a weaker macro environment provided an offset.

“Freight demand in the third quarter of 2022 softened sequentially compared to the first and second quarters of 2022,” CEO Mike Gerdin stated in a news release. “While the current levels are down compared against the unprecedented levels experienced in the later months of 2021, we continue to have more opportunities to haul freight than we are able to cover with our existing fleet and available drivers.”

The carrier reported an 80% y/y increase in revenue to $274 million in the quarter. Excluding fuel surcharges, revenue was up 70%.

The company does not provide operating metrics for utilization and pricing in its quarterly reports.

The result included one month of contribution from Contract Freighters Inc. (CFI), which Heartland acquired at the end of August. CFI had 2,100 tractors generating $575 million in annual revenue at the time it was acquired.

The deal was said to be immediately accretive to earnings.

The third quarter also included results from Smith Transport, which was acquired at the end of May. Smith was running an 850-tractor fleet with roughly $200 million in annual revenue at the time.

Heartland expects the two deals to double annual revenue in 2023 when compared to 2021.

A consolidated adjusted operating ratio of 83.7% was 920 basis points worse y/y. A decline in gains on sale and nonrecurring expense items were headwinds. Also, the recently acquired fleets are underperforming legacy Heartland operations.

Heartland and 2019 acquisition Millis Transfer reported a low-80% unadjusted OR. Smith and CFI operated in the 90% range. As with prior acquisitions, Heartland plans to have both carriers operating in a low-80% range within three years.

“We believe this strategy has proven to be successful with past acquisitions, and we are focused on delivering the same in partnership with both Smith Transport and CFI,” Gerdin said.

As a percentage of revenue (excluding fuel), the salaries, wages and benefits, and depreciation and amortization expense lines were down 420 bps and 370 bps, respectively. However, the change in mix brought on by the acquisitions and the addition of an asset-light logistics operation drove purchased transportation costs significantly higher y/y.

Heartland took on leverage to facilitate the acquisitions. It ended the quarter with cash of $65 million, a reduction of more than $100 million from the second quarter. Debt and financing lease obligations jumped tenfold to $465 million.

Smith and CFI are running older fleets.

Heartland’s average tractor age increased to 2.1 years from 1.7 in the third quarter of 2021. The average trailer age is now 6.2 years compared to 3.3 a year ago.

“Given what we have experienced and based on feedback from our strong group of customers, we expect volatile freight demand for the remainder of 2022, along with minimal incremental lift from the peak holiday season typically experienced during the fourth quarter,” Gerdin said.

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Editor: Todd Maiden