ArcBest Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. ArcBest provides freight transportation and logistics services through its Asset-Based, ArcBest (asset-light logistics), and FleetNet segments. Unless stated otherwise, figures below are in millions of dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $720.4 | $676.6 | $1,371.5 | $1,298.1 |
| Operating income | $24.7 | $16.7 | $12.5 | $7.4 |
| Net income | $15.8 | $10.2 | $8.4 | $4.1 |
| Diluted EPS | $0.60 | $0.39 | $0.32 | $0.16 |
| Operating margin | 3.4% | 2.5% | 0.9% | 0.6% |
Revenue increased 6.5% in Q2 and 5.7% in H1; operating income and net income also improved year over year. Management attributed stronger results primarily to higher revenue, cost management, and yield initiatives. Consolidated Adjusted EBITDA, a non-GAAP measure, was $54.7 million in Q2 versus $47.7 million and $75.1 million in H1 versus $68.1 million.
- Asset-Based: Q2 revenue rose 5.8% to $514.5 million and operating income rose to $22.2 million from $17.4 million; operating ratio improved to 95.7% from 96.4%. H1 revenue was $978.9 million and operating income $12.1 million. Q2 billed revenue per hundredweight, including fuel surcharges, increased 6.1%; daily tonnage was nearly flat, while shipments per day rose 4.4% and average weight per shipment fell 4.1%.
- ArcBest segment: Q2 revenue increased 14.0% to $175.9 million and operating income rose to $5.8 million from $2.2 million. Growth included LDS acquisition contributions and stronger Expedite activity. Net revenue margin declined to 20.8% from 21.3%, as purchased-transportation costs rose faster than customer rates amid tighter spot-market capacity.
- FleetNet: Q2 revenue declined 12.6% to $36.5 million, mainly on fewer roadside service events; operating income edged up to $0.7 million from $0.6 million through cost alignment and labor efficiencies.
Cash, debt, and liquidity
For H1, operating cash flow was $51.3 million versus $53.8 million. Investing activities used $25.9 million and financing activities used $38.1 million; cash and cash equivalents decreased $12.7 million to $102.6 million. Short-term investments were $54.1 million, giving total cash and short-term investments of $156.7 million, down from $172.1 million at year-end 2016.
Total debt was $257.3 million at June 30, 2017, compared with $243.7 million at December 31, 2016; $62.6 million was current. Debt included $70.0 million drawn on the credit facility, $45.0 million under the receivables securitization program, and $141.7 million of notes payable. The company reported compliance with financing covenants. The securitization program had $61.0 million of available capacity after letters of credit. In July, after quarter-end, ArcBest increased the credit facility’s initial maximum from $150 million to $200 million, increased potential additional commitments from $75 million to $100 million, and extended maturity to July 7, 2022.
H1 cash use included $34.9 million of long-term debt payments, $4.1 million of dividends, and $3.6 million of share repurchases. The company financed $38.6 million of equipment purchases. Its 2017 estimate for total net capital expenditures, including financed amounts and net of asset sales, was $150–$165 million. The board declared a further $0.08-per-share dividend payable in August.
Outlook, notable items, and risks
- Management said it expected liquidity from cash, operating cash flow, and available borrowing capacity to meet needs for the foreseeable future. It estimated an approximately $4.0 million “Other and eliminations” loss for Q3 2017 and approximately $1.0 million of restructuring charges for the remainder of 2017. It also expected pension settlement expense of about $1.0 million per quarter, subject to variation.
- ArcBest began applying space-based pricing to certain LTL tariff shipments on August 1, 2017, using freight dimensions to supplement weight-based pricing. Management said customer acceptance and revenue-per-hundredweight effects were uncertain. July Asset-Based billed revenue per day rose about 3% year over year, with daily tonnage down 3%; management cautioned that the pricing trend might not continue.
- Q2 and H1 results included restructuring charges of $0.4 million and $2.0 million, respectively, and pension settlement expense of $0.7 million and $2.7 million. A new share-based compensation accounting rule contributed a $1.2 million tax benefit in H1, including $0.04 and $0.05 per diluted share for Q2 and H1, respectively. Changes in life-insurance cash surrender value also contributed to earnings.
- Approximately 83% of Asset-Based employees were covered by the Teamsters agreement, which runs through March 31, 2018. Contractual wage rates increased 2.5% effective July 1, 2017. The Central States multiemployer pension plan was reported in critical and declining status, with a projected funded percentage of 40%; management said insolvency was projected within 10 years or less absent legislative action. Withdrawal from certain multiemployer plans could create material liabilities.
- Other exposures include competition and pricing pressure, fuel-price and surcharge uncertainty, seasonal and weather-related demand, labor and benefit costs, customer concentration, cyber incidents, regulatory and environmental matters, and execution of restructuring and growth initiatives. Environmental cleanup reserves were $0.5 million; management said routine legal matters were not expected to materially affect results. No material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- Whether space-based pricing improves Asset-Based yield without causing customer losses, and how shipment mix, tonnage, and labor productivity develop.
- Progress on the March 2018 labor-contract renewal and any resulting wage, benefit, or multiemployer pension contribution changes.
- ArcBest segment margins as purchased-transportation costs and acquired LDS operations affect profitability.
- Capital spending, equipment financing, debt levels, and borrowing availability under the amended credit facility and securitization program.
- The extent of future pension settlement charges, restructuring costs, and tax-rate volatility from share-based compensation.