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Heartland Express embarks on its biggest challenge yet

Back-to-back deals place pressure on management to execute

Heartland Express takes on another turnaround story. (Photo: Jim Allen/FreightWaves)

Management from Heartland Express will roll up its sleeves to again integrate a fleet with a less than stellar operating track record. On Monday, the Iowa-based truckload carrier acquired several assets from the Contract Freighters Inc. (CFI) portfolio, which is owned and operated by TFI International, for an enterprise value of $525 million.

In the deal, Heartland gets the over-the-road TL fleet (CFI Truckload), CFI Temp-Control and the Mexican cross-border TL and LTL asset-light logistics unit (CFI Logistica). The transaction is expected to make Heartland (NASDAQ: HTLD) the eighth-largest TL fleet in the U.S. with approximately 5,550 tractors, 17,800 trailers and $1.3 billion in annual revenue.

The deal did not include CFI’s dedicated trucking business or its U.S. brokerage operations, which will remain under the TFI (NYSE: TFII) umbrella.

Missouri-based CFI’s acquired entities generated revenue of approximately $575 million ($476 million excluding fuel surcharges) in the 12-month period ended June 30. The big prize for Heartland is CFI Truckload, which accounted for $409 million of revenue (excluding fuel) for the period. However, this transaction will have some added challenges as the unit disentangles from TFI’s shared services platform.

Acquisition price$525M cash enterprise value
Assets acquired2,100 tractors, 8,000 trailers and 6 terminals
Target revenue run rate$575M (LTM)
Heartland revenue run rate$640M (LTM)
Earnings expectations“immediately accretive”
Recent acquisitions by HeartlandSmith Transport, Millis Transfer, Gordon Trucking and Interstate Distributor
Financingcash and debt
Table: Company reports

Another turnaround story

Most recently CFI has been performing at a mid-90s operating ratio, although it has historically operated in the low-90% range. CFI Truckload will now need to be transitioned into a stand-alone operating unit, which means unwinding the interconnectivity between it and its dedicated and U.S. logistics offerings as well as the responsibilities of being part of the TFI transportation conglomerate.

“They were doing a lot of things last year, and they did not execute well on getting rate increases … they got some. I think they would admit as well they should have gotten more,” Mike Gerdin, chairman, president and CEO at Heartland, said on a Monday call with analysts. “I think that we can just give it more attention, so to speak, than TFI was able to with all the things that they’re doing.”

Last year, TFI consolidated its U.S. TL operations under CFI. Recent changes also included the integration of Transport America and UPS’ (NYSE: UPS) TL division, part of the acquisition of UPS Freight (now TForce Freight), under the CFI banner.

Gerdin said CFI is renting a number of drop yards where Heartland already has terminals, so that expense essentially goes away as those leases are exited. He also sees some cost relief around headcount and equipment purchasing. As part of the transaction, TFI will retain prior auto liability and workers’ compensation claims, removing a cost overhang in the near term that most fleets must account for.

The goal is to achieve an 85% OR within three years of closing, a turnaround feat that Heartland has accomplished in the past with the integration of Millis Transfer, which it acquired in 2019. Integrations, revenue synergies, better purchasing power and a much better TL market were some of the catalysts used to lower Millis’ OR in the period since.

During the second quarter, Heartland had that fleet operating at a sub-80% level, including gains on sale and in the low-80% range excluding gains. Over the three-year span, revenue per tractor per week has improved 30% at Millis.

“This is the playbook and model that we would look to expand upon,” CFO Chris Strain stated on the call.

The starting point for the CFI transaction is likely near that of Millis and better than the 2013 acquisition of Gordon Trucking, which was running at a 98% OR at the time, and much better than the 2017 deal with Interstate Distributor, which was a losing operation at a 106% OR.

Size and timing put management under the microscope

This is the biggest transaction Heartland has undertaken and the timing makes it a little more complicated. Most of Heartland’s deals have been north of $100 million and as high as $300 million, but the carrier has never taken on two new fleets in such a short period of time. In June, it acquired Smith Transport, an 850-tractor fleet, for $170 million.

“Would I have liked this to happen in 2023? Yes. But it wasn’t going to be available in 2023,” Gerdin said. “Somebody else was going to buy this company and we’ve admired it for so long. It’s going to be a challenge for our management team as we go forward but certainly something that we can handle.”

The company will also take on more debt than it has in the past to fund the deal. The transaction will be funded by cash and a new $550 million lending commitment. However, following the transaction’s close, Heartland is expected to have a net leverage ratio of only 1.25x, very healthy even for a non-acquisitive company.

Pro forma numbers also include the expectation of operating cash flow of $260 million annually with $160 million in available liquidity. The deal is expected to be immediately accretive to earnings and all transaction debt incurred will be paid off within four years.

The deal price implies a 5x enterprise value-to-adjusted earnings before interest, taxes, depreciation and amortization multiple, according to the news release.

“In this unprecedented OEM market, for us to pick up 8,000 trailers and pick up 2,000-plus trucks, that’s a huge win in this environment,” Gerdin said. “When you factor that in, I don’t know what that’s worth, but it’s worth a lot.”

The average age of CFI’s tractor fleet is two years, which is in line with Heartland’s fleet.

“CFI, what they bring in this transaction is some open trucks. In a time when we can’t get our hands on some trucks … we have opportunities to fill some seats,” Strain said. “We’re doing — on the Heartland legacy side right now — a good job of retention and hiring drivers. Not a ton of organic growth, but we’re not going backward either.”

CFI provides dry van and temperature-controlled TL services to customers throughout North America, focusing on the North-South corridor in the Midwest with a fleet of 2,100 tractors and 8,000 trailers. CFI’s cross-border operation accesses five major entry points, running tractors to and from the Mexican border with trailers being used by partners inside the country. The company’s six terminals will bring Heartland’s count of owned facilities to 30 across the U.S. and Mexico.

CFI Logistica provides asset-light TL and less-than-truckload services in Mexico.

The current brand names and management team will remain in place. The transaction is subject to regulatory approval and expected to close in the third quarter.

“I’ve been after this company for a long time. I sat on the sidelines and watched it get bought three times from different people,” Gerdin said. Con-way acquired it in 2007. XPO acquired Con-way in 2015 and sold CFI to TFI the following year.              

Gerdin believes unwinding the excess burden of being a part of TFI and running it as a true stand-alone will produce the expected margin goal.

“Let’s just be CFI and let’s truck and let’s do what we do best,” he said. “I’m thrilled to have the brand with us and basically double the size of our company overnight and have a really good platform going forward.”

More FreightWaves articles by Todd Maiden

Watch: Heartland Express acquires CFI truckload unit for $525 million


  1. TR Sorvlet

    I worked for both of these companies in my 1 million+ miles OTR, and know them. Heartland is the WORST ABUSER of DRIVERS in the industry. They won’t reduce their Operating Ratio (cost of operating compared to total revenue) to 85% with “better equipment purchasing power, ” but rather OFF THE BACKS OF DRIVERS!

    You will be ABUSED by dispatchers who are paid by miles dispatched. You’ll be given trip routing to avoid tolls that most co.s allow. If you don’t comply you’re Backcharged for those tolls. Many have been Fired from this co. for no valid reason, such as wanting to work safe. They don’t allow pets. (Will submit first half so as not to lose it). (cont.)

    1. TR Sorvlet

      If we took 4 days off or more…we had to EMPTY OUT the truck and leave it at a terminal. They have such a HIGH TURNOVER…they don’t want trucks abandoned everywhere!

      It seems they’ve made the high turnover a part of their business plan. (What kind of people are they?!) We feel that some companies take very inflated tax write-offs for expenses incurred on turnover, to increase their bottom line. Washington won’t address this though we’ve urged them to do so. “If they don’t succumb to our abuse, we’ll make alot $$ off the turnover.” Then they have empty equipment to sell to increase profits.

      What a way to go through life, Heartland, abusing and creating problems for people (the substantial stress of a job change.)
      We all have to answer for our actions in this world…at some point.

      TR SORVLET Director
      [email protected]

        1. TR Sorvlet

          Heartland CFO Strain needs to be called out on his fabrication/ lie on the recent Conference Call. “Heartland…doing a good job of retention and hiring drivers…we’re not going backwards.” Before they bought Smith Transport in June, look at their quarterly reports and their total revenue year over year. You’ll see it fell for MANY CONSEQUTIVE QUARTERS. That’s because it’s well entrenched with drivers that they are the MOST VICIOUS ABUSER OF TRUCKERS. The only way they can get drivers now is to buy a company.

          [email protected]

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.