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UPDATED: Heartland pulls in a lot less revenue than last year, but its earnings and OR are strong

(Photo credit: Heartland Express)

  Source: Truckstockimages

(Additional material from analyst comments.)

Heartland Express (NASDAQ: HTLD) recorded a significant drop in revenues for the third quarter ended September 30, but a sharp drop in expenses led it to gains in its operating ratio and net income.

The truckload carrier, which does not hold an investors call in conjunction with the release of its quarterly earnings, recorded operating revenue of $151.3 million compared to $182.1 million in the corresponding quarter of 2017. Fuel surcharges were flat at a bit more than $21 million, so that is not the reason for the decline in revenue during what has been described as a strong trucking market.

SeekingAlpha, which tracks consensus earnings and revenue forecasts by analysts, said the revenue numbers fell short of projections by $11.5 million. But earnings per share of 23 cts using GAAP guidelines were 2 cts more than projections.

In its earnings statement, Heartland CEO Michael Gerdin focused mostly on the company’s net income, its operating ratio and the integration of acquired company IDC into the fold.

The improvement in operating ratio is significant. In the third quarter of last year, Heartland’s operating ratio was 92.9% and its adjusted OR was 91.9%. This year, those numbers were 83.4% and 80.7%, respectively.

Big shifts in that number for the quarter also pushed the nine-month OR down to 87%, compared to 87.8% after nine months of 2017.

The OR and increase in net income to $19 million from $7.9 million last year was accomplished as the company significant reduced its compensation costs and its purchased transportation. Salaries, wages and benefits declined to $55.1 million from $71.4 million, while rent and purchased transportation fell sharply, to $4 million from $16.6 million.

The drop in revenue appeared to not be a concern to Gerdin, who praised many other developments for the company during the quarter. “Consistent with our acquisition plan of IDC, over the past year, we have integrated IDC into the Heartland platform and culture, focused on the most profitable customers and lanes, reduced our overall cost structure, significantly reduced the costs and operating limitations by ending many revenue equipment lease obligations, reduced the average age of our tractors and trailers, and heightened the level of service and safety afforded our customers and drivers, Gerdin said in the company’s prepared statement.

Heartland acquired IDC in the third quarter of 2017.

The reference to focus on “the most profitable customers and lanes” is a recurring theme among companies, who have altered strategies in which service that is not profitable or barely profitable is being jettisoned to focus on business that is.

CFRA analyst Jim Corridore said the drop in revenue could have been expected given the company’s strategy. “Revenues were slightly below our expectations and declined 17% as HTLD rationalized business to increase profitability and drove fewer miles,” Corridore wrote in a report to investors. “These efforts paid off, we think, evidenced by operating margin improvement as the adjusted operating ratio improved to 80.7% from 91.9%.”

But his comments were not all positive: “HTLD has been focused on cutting unprofitable and low profit routes gained from last year’s acquisition of Interstate Distributor,” Corridore wrote. “While HTLD is doing a better job here, its focus on cutting miles and costs has hurt its ability to take full advantage of a strong demand environment. HTLD is shrinking, while peers are growing.”

At Deutsche Bank, the team led by Amit Mehrotra said Heartland “was able to offset the topline decline by prioritizing margins over volume, focusing on the most profitable customers and lanes.”

“Comparing the third quarter of 2018 to the third quarter of 2017, our first quarter of ownership, the results of these efforts are that our operating ratio has been reduced to our historical and targeted levels and our consolidated operating income has nearly doubled,” Gerdin said.

Heartland has no long-term debt on its balance sheet. It holds $120 million in cash, up from $75.3 million at the end of 2017’s third quarter.

Heartland’s stock dropped 24 cts Wednesday to $18.46, a decline of 24 cts or 1.28%.

The Heartland decline was less than many other trucking companies that were hammered Wednesday. Knight Swift (NYSE: KNX) was down $1.12 or 3.47%; Old Dominion Freight (NASDAQ: ODFL) was down 2.44% or $3.39; Marten Transportation (NASDAQ: MRTN) , which reported earnings Tuesday, was down 71 cts, a drop of $3.54. The broader S&P 500 was essentially flat on the day.

A call to Heartland was not returned by publication time.

John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.