Heartland Express (NASDAQ: HTLD) used its debt-free balance sheet and ability to generate strong cash flow to make another acquisition.
On August 26, 2019 Heartland announced that it had acquired dry van truckload (TL) carrier Millis Transfer for approximately $150 million.
The lead up to the deal
The potential for the acquisition was evident when the company reported second quarter 2019 earnings showing its largest cash position since the third quarter of 2012 at $205.6 million with no debt on the balance sheet.
Even with revenue down 9 percent year-over-year in the period (down 7 percent excluding fuel surcharges), the carrier was able to drive operating income 31 percent higher in the quarter as it modestly beat analysts’ expectations ($0.02 beat). The second quarter net income increase of 26 percent drove cash flow from operations to $71.7 million for the first half of 2019 and the company’s cash coffers almost $30 million higher. Heartland had only $80 to $100 million in net capital expenditures on the agenda for 2019 – because it only has to refresh one of the industry’s youngest fleets (tractor fleet average age of 1.5 years, 3.2 years for trailers), many were left wondering what the company’s next move might be.
There are really only three choices for spending cash for a company generating a significant amount of it and no large capital expenditures on the horizon or debt that can be repaid. Dividends, share repurchases or acquisitions were the only viable options for the carrier to re-deploy its cash balance. Heartland already returns cash to its shareholders as it pays a token regular quarterly dividend of $0.02 per share. The company also has an active share repurchase program with 6.9 million shares available to purchase, although it hasn’t repurchased any of its common stock through the first half of 2019.
A special dividend, a one-time usually cash payment to shareholders of record on a certain date, was a possibility. Heartland has done this is the past, paying special dividends of $1 per share in 2010 and 2012 and a $2 per share special dividend in 2007. Heartland could have followed its competitors who have faced similar circumstances this year.
In early August, temperature-controlled TL carrier Marten Transport (NASDAQ: MRTN) announced that it would pay a $0.65 per share special dividend. This announcement was on the heels of its record second quarter 2019 earnings report in which it grew operating income 29 percent on a consolidated basis.
In mid-May, Omaha-based Werner Enterprises (NASDAQ: WERN) announced a very large $3.75 per share special dividend that was to be funded with debt. With two-thirds of its capital expenditures slated for the first half of 2019 for its truck fleet that averages 1.8 years old, the company felt that the large one-time payment was the best way of deploying its capital and returning value to its shareholders. Werner does not have a history of making acquisitions.
In both instances each company increased its share repurchase authorization in addition to the one-time payments.
So Heartland chose door number three – acquisitions. A road it has been down before – seven times since 1987. The two most recent were large transactions announced in 2013 and 2017.
About the Millis acquisition
Millis Transfer is a dry van asset-based TL carrier headquartered in Black River Falls, Wisconsin. The third-generation family-owned company, and affiliated entities, have 11 terminal locations in Georgia, Illinois, New York, North Carolina, Ohio, Texas, Virginia and Wisconsin primarily serving the Midwest, eastern United States and Texas. Millis has approximately 840 drivers and 850 power units according to the Federal Motor Carrier Safety Administration.
Millis boasts a sub-50 percent driver turnover rate and has a fully compliant electronic logging device (ELD) fleet. Millis sources potential drivers through the Millis Training Institute, which has five driver training locations throughout the country. Heartland will not need to invest meaningfully in Millis’ fleet, which has an average tractor age of approximately two years (four years for trailers) as it has done in prior acquisitions.
The roughly $150 million transaction, which includes assumed debt, will be funded with cash and $750,000 of HTLD stock. Millis had $152 million in revenue over the last 12 months. No disclosure regarding Millis’ current or Heartland’s future earnings was provided, but management said that the deal was expected to be accretive to Heartland’s earnings in Millis’ first full quarter of operations under the Heartland umbrella.
Heartland may have paid a healthy earnings before interest, taxes, depreciation and amortization (EBITDA) multiple for the deal. Mergers and acquisitions in the asset-based TL sector usually see multiples as low as a couple of turns of EBITDA up to mid to high-single digit multiples of annual EBITDA. With $150 million in revenue, the company would need to generate a double digit EBITDA margin (amongst the industry’s best) to stay within the high end of that range.
The higher price was likely worth it as Heartland will still end the year with $50 to $60 million in cash and no debt. In regard to future fleet spending, Heartland stated in the press release announcing the acquisition, “our capital expenditure requirements for the next several quarters are modest, absent opportunistic purchases. Millis has an outstanding fleet of equipment and we look forward to utilizing their fleet and professional drivers to serve our combined group of customers.”
For a point of reference, Heartland’s acquisition of Gordon Trucking was done at a 5x adjusted EBITDA multiple (4x including cash tax benefits).
In 2017, Heartland acquired Interstate Distributor and its 1,570 tractors and approximately 4,700 trailers, which had $325 million in revenue in its last calendar year prior to the acquisition. This deal was mostly an overlap of Heartland’s existing footprint, which provided it with some terminal consolidation opportunities. Additionally, Interstate provided Heartland with some density in West Coast lanes. Interstate was running an older fleet at the time – approximately three-year old average age – which forced Heartland to meaningfully increase its capital expenditures to lower the fleet age and reduce maintenance expenses.
In 2013 it added Pacific, Washington-based Gordon Trucking to its portfolio in a $300 million deal. Gordon’s roughly 2,000 tractors had generated revenue in the previous 12 months leading up to the transaction in excess of $400 million. Importantly, the deal helped Heartland balance its national network by providing the company with a significant presence in the west. Prior to this acquisition, Heartland had been a mostly East Coast and Midwest operator (less than 20 percent of its business came from western terminals), although it had been organically growing a footprint in the west.
Immediately following the deal, Heartland’s network balance was 58 percent east and 42 percent west. Heartland had a similar issue in this deal as it did with the Interstate deal. It wanted to lower the company’s average tractor from the 3.25 years at the time of purchase.
All of Heartland’s acquisitions have some commonality. They fill a geographical need; the acquired carrier is driver-focused and has a strong safety record; and the deals are expected to be immediately accretive to earnings.
“We are very pleased to welcome everyone at Millis to Heartland Express. We are impressed with the high quality of the driving professionals and the organization’s safety profile. In addition, the regional coverage, equipment, conservative and disciplined management style, and culture are all very compatible with our approach. The current Millis family management team has over 113 years of combined experience and will remain with the business in their current roles. We expect Millis to contribute to our ongoing success immediately, and with opportunities for further improvement, get even better over the long-term,” said Heartland Express’ Chairman and Chief Executive Officer Michael Gerdin.
Shares of HTLD are up more than 2 percent on the news.