ArcBest Corporation — Q3 2015 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2015; financial comparisons are with Q3 and the first nine months of 2014. ArcBest provides freight transportation and logistics services. ABF Freight, its asset-based LTL carrier, generated about 71% of revenue before other revenues and intercompany eliminations; asset-light logistics businesses generated about 29% in 2015.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $709.4m | $711.3m | $2,018.8m | $1,947.8m |
| Operating income | $33.4m | $32.9m | $68.2m | $51.2m |
| Net income | $19.2m | $19.6m | $39.9m | $31.6m |
| Diluted EPS | $0.72 | $0.72 | $1.48 | $1.16 |
| Operating margin | 4.7% | 4.6% | 3.4% | 2.6% |
Q3 revenue was nearly flat year over year while operating income rose modestly; net income declined 2.4%. For nine months, revenue increased 3.6%, operating income 33.2%, net income 26.0%, and diluted EPS 27.6%. Effective tax rates were 40.2% and 39.5% in Q3 and nine-month 2015, versus 39.7% and 37.9% in the comparable 2014 periods.
Operating cash flow was $119.6m for the first nine months, versus $118.2m. Investing used $84.4m, including $53.6m of property and equipment purchases net of financings, $5.2m for an acquisition, and $6.2m of internally developed software. Financing used $0.5m. Cash and cash equivalents ended at $191.6m; short-term investments were $69.6m, giving $261.2m unrestricted cash, equivalents, and investments.
Total debt was $191.6m, up from $127.7m at year-end 2014; cash and short-term investments exceeded debt by about $69.6m. The company had $70m outstanding under its $150m revolving credit facility and $35m under its receivables securitization program. After $19.4m of standby letters of credit, reported securitization availability was $45.6m. Management said liquidity sources should meet foreseeable needs; the company was in compliance with financing covenants.
Material changes versus prior comparable periods
- ABF Freight Q3 revenue declined 2.3%; tonnage per day fell 2.5%, partly offset by a 0.5% increase in billed revenue per hundredweight. Its operating ratio improved to 94.8% from 95.3%. For nine months, ABF Freight revenue rose 0.8% and operating income rose to $54.7m from $35.4m.
- Lower fuel prices reduced fuel surcharges and reported revenue. ABF Freight reported lower fuel expense, but salaries, wages, and benefits rose as a share of revenue to 59.6% in Q3 and 60.7% for nine months, from 56.3% and 57.8%.
- Combined asset-light segment revenue increased 6.1% in Q3 and 12.0% year to date. ABF Logistics and FleetNet grew; Panther revenue and operating income declined amid greater truckload capacity and lower revenue per shipment. ABF Moving revenue grew, partly on government shipments, but Q3 operating income fell.
- Capital investment increased: nine-month property and equipment purchases net of financings were $53.6m versus $23.8m. Revenue equipment purchases were partly financed with $51.0m of notes payable. The company acquired truckload brokerage Smart Lines for $5.2m in January 2015.
Outlook, commentary, risks, and unusual items
- No formal earnings or revenue guidance is provided. Management estimated 2015 net capital expenditures of about $160m, depreciation and amortization of $90m–$95m, and pension settlement expense of about $1m per quarter for the remainder of 2015, subject to variability.
- ABF Freight implemented a nominal 4.95% LTL tariff increase effective October 5, 2015. October billed revenue per day was about 4% below October 2014 as tonnage declined about 6%, partly offset by a roughly 2% increase in billed revenue per hundredweight. Management cautioned that pricing trends may not continue.
- Management cited a softer freight market, higher customer inventories, weaker industrial-related manufacturing, available spot truckload capacity, competitive pricing, fuel-surcharge uncertainty, and labor and benefit costs as important operating risks. Approximately 79% of ABF Freight employees were covered by the Teamsters agreement through March 31, 2018.
- About half of ABF Freight’s multiemployer pension contributions went to the Central States plan, reported 47.9% funded and in critical and declining status. The plan filed for approval of a proposed pension rescue plan; any approved participant benefit reductions would not reduce ABF Freight’s contribution rates under the current labor agreement. ABF Freight also received notice that the Road Carriers Local 707 fund would become insolvent; the company did not expect higher contributions during the current agreement, but gave no assurance.
- Nonunion pension plan funded status was a $23.1m deficit at September 30. Pension settlement expense was $2.5m for nine months, down from $5.4m a year earlier. Nonunion healthcare claims costs increased $6.1m year over year for nine months.
- Environmental and legal matters include Clean Water Act suits concerning the Kent, Washington and Brooklyn, New York facilities, and a trademark infringement suit against Panther. The company said outcomes for the Brooklyn and Panther matters could not yet be assessed; it expected the Kent matter to resolve for less than $0.2m. Environmental cleanup reserves were $0.8m.
- The board declared a quarterly dividend of $0.08 per share in October, up from $0.06, and extended the repurchase program with $50m available. The company repurchased $10.0m of shares during the first nine months.
Important facts for investors to verify
- Whether ABF Freight can sustain operating-ratio improvement as tonnage weakens and labor costs remain elevated.
- Progress in ABF Freight pricing, fuel-surcharge recovery, and October’s volume and revenue trends.
- Central States and other multiemployer plan developments, future contribution requirements, and related pension exposure.
- Capital expenditure and equipment financing levels, debt maturities, and remaining availability under credit and securitization facilities.
- Outcomes and potential financial exposure from the environmental and Panther legal proceedings, plus healthcare-claims trends.