ArcBest Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; compared with the three months ended March 31, 2017. Unaudited. ArcBest provides freight transportation and logistics services through Asset-Based, ArcBest (asset-light) and FleetNet segments. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $700.0 | $651.1 |
| Operating income (loss) | $12.7 | $(9.9) |
| Operating margin | 1.8% | (1.5)% |
| Net income (loss) | $10.0 | $(7.4) |
| Diluted EPS | $0.37 | $(0.29) |
| Operating cash flow | $31.8 | $1.8 |
| Cash, cash equivalents and short-term investments | $179.3 at March 31, 2018 | $177.2 at December 31, 2017 |
| Total debt | $252.5 at March 31, 2018 | $268.9 at December 31, 2017 |
| Stockholders’ equity | $665.5 at March 31, 2018 | $651.5 at December 31, 2017 |
Operating cash flow funded $16.6 million of debt payments, $6.1 million of capital expenditures net of asset-sale proceeds, and $2.1 million of dividends. Cash and investments less reported debt were approximately $73.2 million. The company reported $130.0 million of available capacity under its revolving credit facility and $62.3 million under its receivables securitization program; it was in compliance with facility covenants at quarter-end. Current assets were $532.1 million and current liabilities $398.6 million.
Consolidated Adjusted EBITDA, a non-GAAP measure, was $41.3 million versus $20.5 million. It should be considered alongside, not as a substitute for, GAAP results.
Material changes and segment results
- Revenue increased 7.5%. Asset-Based revenue rose 3.8% to $482.1 million; ArcBest revenue increased 19.0% to $181.9 million; FleetNet revenue increased 18.7% to $47.8 million.
- Asset-Based operating income improved to $13.4 million from an $8.3 million loss. Yield, including fuel surcharges, increased 8.9% per hundredweight, while tonnage per day fell 3.7% and shipments per day fell 9.4%. Its operating ratio improved to 97.2% from 101.8%.
- ArcBest operating income rose to $3.2 million from $1.1 million. Revenue per shipment increased 23.8%, but purchased transportation costs rose faster than customer rates; net revenue margin declined to 18.4% from 20.2%.
- FleetNet operating income rose to $1.5 million from $1.0 million, primarily reflecting higher service-event volume and improved labor efficiencies.
- Management attributed the consolidated improvement chiefly to higher revenue from yield initiatives and cost management, as well as $3.3 million lower nonunion healthcare costs and lower restructuring charges. First-quarter restructuring charges were $0.4 million versus $1.6 million.
Outlook, risks and unusual items
- Labor agreement: A tentative 63-month Teamsters agreement, running April 1, 2018 through June 30, 2023, was reached March 28 and remained subject to employee ratification. It includes annual wage increases, current pension contribution rates, and annual health and welfare contribution increases. Failure to ratify could result in a work stoppage, lost customers or other material adverse effects. Approximately 82% of Asset-Based employees were covered by the agreement.
- Management outlook: 2018 net capital expenditures were estimated at $155–$165 million, net of asset sales, including $100 million for revenue equipment; depreciation and amortization was estimated at $100–$105 million. Management expected the “Other and eliminations” operating loss to be about $20 million for full-year 2018 and consistent with Q1 in Q2. It estimated approximately $10 million of pension-plan cash funding and $20 million of noncash pension settlement charges in 2018, subject to plan elections and IRS determination.
- Operating pressures: Management cited lower Asset-Based shipment volumes, fuel-price volatility and limits on fuel surcharge recovery, and rising purchased transportation costs that may compress ArcBest margins. April billed Asset-Based revenue per day was up approximately 7% year over year; combined Asset-Light revenue per day was up approximately 16%, with continued ArcBest net-revenue pressure.
- Pensions: The Central States multiemployer pension plan was certified as “critical and declining.” A complete withdrawal from certain multiemployer plans could create material liabilities. The nonunion defined benefit pension plan termination may produce additional settlement charges and funding needs.
- Tax and accounting items: Q1 included a $2.6 million provisional deferred tax benefit related to U.S. tax reform and a $1.2 million retroactive alternative-fuel tax credit. These helped reported results and are not necessarily recurring. ASC 606 adoption changed ArcBest revenue recognition to over time; the company recorded a $0.4 million increase to opening retained earnings, and Q1 revenue and purchased transportation expense each decreased $0.3 million. Pension-cost presentation changed, but did not affect net income or EPS. The company expected lease accounting adoption in 2019 to materially affect its balance sheet.
- Other risks and contingencies: The company cited cybersecurity and information-system risks, seasonal and weather effects, customer and pricing competition, self-insurance and environmental exposure. It held a $0.4 million environmental cleanup reserve; management said routine legal matters were not expected to have a material adverse effect. Management believed available liquidity would meet foreseeable needs.
Key facts for investors to verify
- Whether the tentative Teamsters agreement was ratified and how its wage and benefit terms affected labor costs and service continuity.
- Whether Asset-Based yield gains can persist while tonnage and shipment counts remain lower, and whether April trends continued.
- Whether ArcBest can pass higher purchased transportation costs through to customers and stabilize its net revenue margin.
- Actual 2018 capital spending, pension funding and settlement charges versus management’s estimates, including the outcome of the IRS determination process.
- How much reported earnings benefited from tax-related items and whether covenant and borrowing capacity remained adequate as debt and investment needs evolved.