ArcBest Corporation (NASDAQ: ARCB) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. ArcBest provides freight transportation and logistics services. ABF Freight generated about 70% of revenue before other revenues and intercompany eliminations in the first half.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $676.6M | $696.1M | $1,298.1M | $1,309.4M |
| Operating income | $16.7M | $33.5M | $7.4M | $34.7M |
| Net income | $10.2M | $20.0M | $4.1M | $20.7M |
| Diluted EPS | $0.39 | $0.74 | $0.16 | $0.77 |
| Adjusted EBITDA | $47.7M | $60.8M | $68.1M | $88.8M |
Revenue declined 2.8% in Q2 and 0.9% year to date; operating income fell about 50% and 79%, respectively. Operating margin was approximately 2.5% in Q2 versus 4.8% a year earlier, and 0.6% for the first half versus 2.7%. Q2 declared dividend was $0.08 per share, compared with $0.06.
Six-month operating cash flow was $52.5M, down from $74.7M. Investing used $27.0M and financing used $38.2M; cash and cash equivalents ended at $152.2M, down from $165.0M at year-end 2015. Unrestricted cash, cash equivalents and short-term investments totaled $216.3M.
Total debt was $225.5M, including $55.4M current and $170.0M long-term. Cash and short-term investments exceeded debt by approximately $9.1M. The $150M revolving credit facility had $70M drawn; the $100M receivables program had $35M drawn and $45.7M available after letters of credit. The company reported compliance with financing covenants.
Business drivers and changes
- ABF Freight Q2 revenue fell 3.5%; operating income declined to $17.4M from $28.1M. Tonnage per day decreased 4.0% in Q2 and 2.5% in the first half. Management cited weaker industrial-related freight, customer inventory levels and greater truckload capacity.
- ABF Freight operating ratio worsened to 96.4% in Q2 from 94.4%, and to 99.1% for the first half from 97.0%. Wage and benefit costs, lower fuel-surcharge revenue, reduced productivity and higher claims costs weighed on results.
- Asset-light segment results were mixed. ABF Logistics revenue rose with the Bear acquisition and organic shipment growth, but operating income declined amid integration costs and excess capacity. Panther revenue and profit fell with lower shipment revenue and margins. ABF Moving revenue declined, principally due to fewer government shipments.
- Consolidated results also reflected higher nonunion healthcare, workers’ compensation and third-party casualty claims costs. A $13.4M voluntary pension contribution was made in Q2.
Outlook, risks and contingencies
- Management estimated 2016 net capital expenditures of $170M–$190M, including approximately $95M for revenue equipment and $45M for real estate, including a new headquarters and call center. Depreciation and amortization was estimated at $100M–$110M. Spending may be adjusted to business conditions.
- Management expected “Other and eliminations” losses of about $4M per quarter for the remainder of 2016 and estimated nonunion pension settlement expense at about $1M per quarter, subject to variation.
- July 2016 ABF Freight billed revenue per day was approximately 2% below prior year, with tonnage down about 4%; management cautioned that pricing trends were uncertain.
- Multiemployer pension exposure is a material risk. The Central States plan was certified as critical and declining, with insolvency projected within 10 years or less absent legislative action; Treasury denied its proposed rescue plan. ABF’s current contribution terms extend through March 31, 2018, but future contribution rates are uncertain. The 707 Pension Fund also received a Treasury denial of its benefit-reduction proposal.
- Other disclosed risks include competitive pricing and excess capacity, fuel-surcharge recovery, labor costs and collective bargaining, claims and self-insurance, goodwill impairment, cybersecurity, regulation, and economic conditions. Environmental cleanup reserves were $0.8M; management said routine legal matters were not expected to have a material adverse effect.
- Management said existing liquidity and borrowing capacity should meet foreseeable needs. It expected to continue quarterly dividends, subject to Board discretion and applicable restrictions. No numerical earnings or revenue guidance was provided.
Investor verification priorities
- Track ABF Freight tonnage, yields, operating ratio and productivity to assess whether weak demand and excess capacity are easing.
- Review the trajectory of labor, healthcare, workers’ compensation and casualty claims costs, and the implications of multiemployer pension plans.
- Monitor ABF Logistics integration and profitability, and whether asset-light revenue growth translates into improved operating income.
- Reconcile planned capital expenditures and equipment financing with operating cash flow, debt maturities and liquidity availability.
- Assess actual performance against management’s capital spending and cost expectations; the filing provides no explicit consolidated earnings guidance.