Lower gains on sale weigh on results at Heartland Express

Heartland Express truck on highway

Iowa-based truckload (TL) carrier Heartland Express (NASDAQ: HTLD) generated better than expected results during the first quarter of 2020. The carrier’s $0.16 earnings per share was $0.03 ahead of the consensus estimate.  

“Our operating results for the three months ended March 31, 2020 showed strength in terms of profit and overall operating efficiency during these challenging times we face currently as a company and a country,” said Heartland Express CEO Mike Gerdin in the press release.

Of note, the company’s financial results had a headwind in the form of a loss on equipment sales. In the first quarter, Heartland Express incurred a $229,000 loss replacing tractors and trailers. Management said that the loss was related to two wrecked trucks that had to be written off in the period.

Typically, this line item provides Heartland Express and other carriers with gains on sale, booked as an offset to operating expenses, resulting from the disposal of equipment. In the past, these gains have lowered expenses by a few million dollars.

However, prices for used trucks have fallen significantly after record purchasing of new tractors through and after the freight peak of 2018. As post-peak volumes fell off significantly and excess capacity pushed TL rates lower, the demand for new equipment fell, negatively impacting the trade-in values for older equipment. There are other cost headwinds impacting demand for equipment like increased difficulty accessing credit and higher insurance claims and expenses.

3 Year Old Used Truck Price Index (USA) – SONAR: UT3.USA

This isn’t a concern for Heartland Express as the bulk of its tractor trades are locked in through fixed price agreements with the original equipment manufacturers (OEMs). The carrier expects to record gains on the sale of equipment in the $10 to $12 million range during the back half of the year.

The company’s average tractor age was two years at the close of the quarter compared to 1.4 years at the end of the first quarter of 2019. The increase in fleet age is due to Heartland Express’ acquisition of Millis Transfer in 2019. At the time, Millis was operating a tractor fleet that was approximately two years in age.

Heartland Express reported a 19.2% year-over-year increase in revenue to $166.3 million, but operating income declined 16.9% in the period to $17.3 million. Operating income was only $3.5 million lower than the 2019 comparable period even though the disposal of equipment presented a $4.1 million year-over-year cost headwind. The operating income decline was partially offset by the contribution from the Millis Transfer acquisition. Heartland Express reported an adjusted operating ratio (OR) of 88.2%, 520 basis points worse than the year ago period.

Heartland Express does not provide any operating metrics around utilization and pricing.

Heartland Express Key Performance Indicators

Net cash flow from operations totaled $40.1 million in the quarter. The company spent $39.7 million in capital expenditures in the first quarter on revenue equipment and terminal projects, but capital spending is likely to slow as the carrier anticipates $85 to $95 million in net capital expenditures for the rest of the year.

Heartland Express closed the first quarter with $64.2 million in cash and no debt. The company has additional liquidity in the form of $89.7 million in capacity on its line of credit (excluding letters of credit) with the ability to increase its borrowing base by $100 million.

Heartland Express paid off all of the debt associated with the $150 million acquisition of Millis Transfer during the fourth quarter of 2019.

The company repurchased 710,376 shares of its stock during the first quarter and has 6.2 million shares eligible for repurchase on its authorization.

Pointing to the company’s strong balance sheet and ability to generate cash flow from operations, Gerdin concluded, “We believe Heartland Express is well-positioned to navigate a volatile freight market, changing customer needs and relationships, and an uncertain economic landscape in the months ahead.”

Shares of HTLD are flat in mid-day trading.