ArcBest Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. ArcBest provides freight transportation and logistics services through Asset-Based (ABF Freight), ArcBest asset-light logistics, and FleetNet. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Revenue | $793.4 | $720.4 | $1,493.4 | $1,371.5 |
| Operating income | $3.2 | $25.8 | $15.9 | $15.9 |
| Net income | $1.2 | $15.8 | $11.2 | $8.4 |
| Diluted EPS | $0.05 | $0.60 | $0.42 | $0.32 |
| Operating margin | 0.4% | 3.6% | 1.1% | 1.2% |
| Operating cash flow | Not separately provided | Not separately provided | $119.6 | $51.3 |
Revenue grew 10.1% in Q2 and 8.9% in H1. Operating income fell sharply in Q2 but was nearly flat for H1. Q2 results included a one-time $37.9 million pre-tax ($28.2 million after-tax) charge for a New England multiemployer pension withdrawal liability; management said it reduced diluted EPS by $1.05 for Q2 and $1.06 for H1. The filing reports consolidated Adjusted EBITDA of $71.0 million for Q2 and $112.3 million for H1, versus $54.7 million and $75.1 million, respectively, in 2017; this non-GAAP measure adds back the withdrawal charge and other specified items.
- Asset-Based: Revenue rose 8.7% in Q2 and 6.4% in H1. Yield, including fuel surcharges, increased 9.4% and 9.2%, while tonnage per day declined 0.9% and 2.2%. Segment operating income was $3.4 million in Q2 and $16.8 million in H1, including the pension charge. Excluding that charge, management reported improved segment operating performance versus both comparable periods.
- ArcBest segment: Revenue increased 13.7% in Q2 and 16.2% in H1, but higher purchased transportation costs compressed net revenue margin to 18.5%, from 20.7% and 20.5%, respectively. Segment operating income was $3.7 million in Q2 and $6.9 million in H1.
- FleetNet: Revenue rose 28.2% in Q2 and 23.2% in H1, primarily on higher service-event volumes. Operating income increased to $1.0 million and $2.6 million, respectively.
Cash flow and liquidity: Cash and cash equivalents were $159.3 million at June 30, up from $120.8 million at year-end; short-term investments were $68.0 million, bringing cash and investments to $227.3 million. H1 operating cash flow was $119.6 million, including a $37.9 million increase in the multiemployer withdrawal-liability accrual and other working-capital movements. Investing cash outflow was $40.0 million and financing cash outflow was $41.0 million. H1 capital expenditures, net of asset-sale proceeds, were approximately $22.7 million; the company also financed $14.4 million of equipment purchases.
Debt and balance sheet: Total debt and capital lease obligations were $249.6 million at June 30, compared with $268.9 million at December 31, 2017. This included $70.0 million drawn on the revolving credit facility, $45.0 million under the receivables securitization program, and $134.3 million of notes payable. Available borrowing capacity was $130.0 million under the revolver and $62.3 million under the securitization program. Current assets were $590.1 million and current liabilities $450.0 million. The company reported compliance with facility covenants.
Material changes, outlook, and risks
- New England pension transition: The $37.9 million withdrawal-liability charge comprises an expected $15.1 million lump-sum payment in Q3 2018 and $22.8 million present value of monthly payments over 23 years. Under the transition, ABF re-entered the fund’s new employer pool at a lower contribution rate, frozen for 10 years. The separate Central States Pension Plan, receiving about half of ABF’s multiemployer pension contributions, was certified as critical and declining.
- Labor agreement: The 2018 ABF National Master Freight Agreement was implemented July 29, retroactive to April 1, and runs through June 30, 2023. Management estimates contractual wage and benefit costs, including vacation restoration and ratification bonuses, will rise about 2.0% compounded annually over the agreement’s term.
- Management outlook: Estimated 2018 net capital expenditures are $155–$165 million; estimated depreciation and amortization is $100–$105 million. Management expects “Other and eliminations” losses of approximately $5 million in Q3 and $20 million for full-year 2018. It estimated approximately $10 million of 2018 cash funding and $20 million of noncash settlement charges to terminate the nonunion defined-benefit pension plan; actual amounts and timing remain uncertain pending IRS approval and participant elections.
- Operating conditions: Management cited tight truckload capacity, which supported ArcBest pricing but increased purchased transportation costs and compressed margins. Fuel-price volatility, competitive pricing, tonnage and shipment declines, labor and benefit costs, and seasonal or severe-weather effects could affect results. July 2018 billed Asset-Based revenue per day was approximately 12% above July 2017; Asset-Light revenue per day was approximately 9% higher, though ArcBest continued to face margin compression.
- Other items: The effective tax benefit rates were 68.0% for Q2 and 15.0% for H1, affected by tax-law adjustments and credits, including a $1.2 million alternative-fuel credit in H1. Adoption of ASC 606 increased H1 revenue by $0.8 million and purchased transportation expense by $0.5 million. The company expects lease accounting changes effective in 2019 to materially increase balance-sheet assets and liabilities, with minimal expected income-statement and no expected cash-flow impact.
- Contingencies and controls: Management said routine legal matters were not expected to materially affect results; the environmental cleanup reserve was $0.6 million. It disclosed cybersecurity and operational risks, but no material cyber incident to date. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Reconcile reported GAAP earnings with the $37.9 million pension withdrawal-liability charge and the company’s non-GAAP Adjusted EBITDA adjustments.
- Track cash payments and long-term obligations under the New England pension transition, and assess the continuing exposure to Central States and other multiemployer plans.
- Monitor whether Asset-Based yield gains can offset lower shipment volumes, fuel and labor costs, and whether ArcBest can recover purchased transportation cost increases.
- Compare actual capital spending, pension termination funding and charges, and “Other and eliminations” costs with management’s estimates.
- Review borrowing availability, covenant compliance, and the August 2018 amendment extending the receivables securitization program’s maturity to October 1, 2021.