Heartland Express, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results. Heartland provides truckload transportation services, primarily dry van, and expanded its operations through the May 31 acquisition of Smith Transport and the August 31 acquisition of CFI.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $274.0 million | $152.6 million | $613.1 million | $459.1 million |
| Operating income | $34.7 million | $33.3 million | $162.2 million | $78.9 million |
| Net income | $24.4 million | $24.5 million | $118.1 million | $58.9 million |
| Diluted EPS | $0.31 | $0.31 | $1.50 | $0.74 |
| Operating ratio | 87.3% | 78.2% | 73.5% | 82.8% |
| Adjusted operating ratio (non-GAAP) | 83.7% | 74.5% | 81.5% | 80.0% |
Q3 revenue rose 79.5%, primarily reflecting acquired businesses and higher fuel surcharge revenue; net income was essentially unchanged year over year. Nine-month revenue rose 33.5% and net income increased 100.4%. The nine-month GAAP operating ratio improvement was substantially influenced by a $73.2 million gain on sale of a terminal property. Adjusted operating ratio, which excludes specified items including that gain, worsened year over year.
- Cash flow: Nine-month operating cash flow was $112.6 million versus $95.7 million. Investing cash outflow was $621.5 million, including $675.9 million net cash used for the acquisitions, partly offset by property and equipment proceeds. Financing cash inflow was $414.9 million, primarily from debt issuance.
- Liquidity and debt: At September 30, cash and cash equivalents were $64.8 million; cash, cash equivalents and restricted cash totaled $79.8 million. Debt was $432.7 million and finance lease liabilities were $32.4 million; $86.8 million remained available on the revolving facility. The company subsequently paid $25 million of term-loan principal.
- Margins and costs: Q3 fuel expense was $53.4 million, with fuel surcharges of $47.5 million; management said surcharges do not recover fuel costs for empty, out-of-route and idling miles. Higher driver pay, fuel, fleet costs and expenses at the acquired operations weighed on adjusted performance.
- Capital returns: The company declared regular quarterly dividends of $0.02 per share in Q3 2022. It made no share repurchases in the first nine months of 2022; the prior-year period included a special dividend and repurchases.
Material changes and unusual items
- Smith Transport and CFI contributed 20.7% and 20.5% of Q3 revenue, respectively; CFI was included for one month. For the nine-month period, they contributed 12.4% and 9.2%, respectively.
- CFI acquisition consideration was approximately $560.6 million and Smith Transport purchase price was approximately $169.4 million, including assumed indebtedness as described in the filing. The acquisitions increased goodwill, intangibles, equipment and debt; purchase price allocations remained subject to adjustments.
- The company recorded a $73.2 million gain on the terminal sale within nine-month gains on disposal of property and equipment of $92.8 million. Q3 disposal gains were $6.8 million, compared with $15.3 million in Q3 2021.
- Q3 included $1.1 million of acquisition-related expenses; nine-month acquisition-related expenses were $2.3 million. The filing also cites a legal settlement within other operating expenses but does not provide a clear separate value.
Outlook, risks and contingencies
- Management expected a muted fourth-quarter peak season and softer freight demand than in 2021, with volatile freight demand and diesel prices. It cited driver shortages, supply-chain constraints for equipment and parts, and consumer inventory volatility.
- Management planned to focus on cost reduction and freight optimization at Millis Transfer, Smith Transport and CFI, and to pay down acquisition-related debt. While doing so, it did not expect special dividends, share repurchases or significant acquisitions. It anticipated approximately $45–$50 million of fourth-quarter net capital expenditures, subject to equipment pricing and availability.
- The $550 million credit facility included $450 million of term loans and a $100 million revolver. Covenants include maximum net leverage of 2.75-to-1.00 and minimum interest coverage of 3.00-to-1.00. A 1% increase in SOFR was estimated to increase annual interest expense by approximately $4.3 million at then-current variable-rate borrowings.
- Management identified risks from acquisition integration, retaining drivers and key employees, CFI transition services and internal controls, and CFI’s Mexican operations. Other exposures include interest rates, fuel and tire prices, insurance claims, and ordinary-course litigation. Management said pending claims were adequately provided for and did not expect routine litigation to materially adversely affect the financial statements.
Important facts for investors to verify
- How quickly CFI and Smith Transport can be integrated and their operating ratios improved, and whether expected synergies are realized.
- Underlying earnings and cash generation apart from the terminal-sale gain and other acquisition-related or non-GAAP adjustments.
- Debt repayment pace, variable-rate exposure, covenant headroom and liquidity after capital spending and lease obligations.
- Freight demand, fuel surcharge recovery, driver availability, and equipment and parts costs against management’s outlook.
- Final acquisition purchase accounting, including goodwill and intangible valuations, and the effect of acquired-company controls being excluded from the 2022 internal-control assessment.