ArcBest Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Figures below are in U.S. dollars unless stated otherwise.
Business context
ArcBest provides freight transportation and logistics services. ABF Freight, its asset-based less-than-truckload carrier, generated about 70% of revenue before other revenues and intercompany eliminations. Its asset-light businesses include Panther, ABF Logistics, FleetNet and ABF Moving.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $713.9m | $709.4m | $2,012.0m | $2,018.8m |
| Operating income | $20.4m | $33.4m | $27.8m | $68.2m |
| Net income | $12.9m | $19.2m | $17.1m | $39.9m |
| Diluted EPS | $0.49 | $0.72 | $0.64 | $1.48 |
| Operating margin | 2.9% | 4.7% | 1.4% | 3.4% |
| Adjusted EBITDA | $51.7m | $60.3m | $119.8m | $149.1m |
Revenue was up 0.6% in Q3 and down 0.3% year to date, while operating income declined 39% and 59%, respectively. Net income declined 32% in Q3 and 57% year to date. The nine-month effective tax rate was 37.2%, versus 39.5% in 2015.
- Cash flow: Nine-month operating cash flow was $87.9m, down from $119.6m. Investing used $68.7m and financing used $53.8m; cash and cash equivalents fell $34.6m to $130.4m.
- Liquidity: Cash, cash equivalents and short-term investments totaled $189.7m, compared with $226.6m at December 31, 2015. Current assets were $532.9m and current liabilities $399.0m.
- Debt: Total debt was $237.6m, versus $212.5m at year-end 2015, including $70m drawn on the credit facility, $35m under receivables securitization and $131.9m in notes payable. The company reported compliance with debt covenants.
- Capital returns: Dividends declared were $0.08 per share in each 2016 quarter. The company repurchased 419,692 shares for $7.6m during the first nine months.
Material changes and operating drivers
- ABF Freight revenue declined 0.4% in Q3 and 1.5% year to date. Tonnage per day fell 2.8% and 2.6%; lower weight per shipment and fuel surcharges weighed on revenue. Its operating ratio deteriorated to 96.5% in Q3 from 94.8%, and to 98.2% year to date from 96.2%.
- ABF Freight faced a soft freight market and greater truckload capacity, while labor costs, health care and casualty/workers’ compensation claims rose. Lower fuel prices reduced fuel costs but also reduced surcharge revenue.
- Asset-light revenue grew 3.2% in Q3 and 3.0% year to date, partly from the Bear and LDS acquisitions. Results varied: Panther’s Q3 operating income improved, but year-to-date income declined; ABF Logistics revenue rose with acquisitions but operating income fell; FleetNet and ABF Moving revenue and income declined.
- On September 2, 2016, ABF Logistics acquired LDS for a stated transaction value of $25m, including $17m paid at closing and up to $8m contingent consideration. Purchase accounting remained provisional.
- Higher nonunion health care and casualty/workers’ compensation costs, plus lower operating leverage, pressured results. Changes in life-insurance cash surrender value benefited diluted EPS by $0.06 in Q3 and $0.08 year to date versus 2015.
Outlook, risks and unusual items
- Management announced a restructuring to combine Panther, ABF Logistics and ABF Moving into an asset-light ArcBest operation and unify sales, pricing, service, marketing and capacity sourcing. It estimated annualized operating expense savings of about $15m.
- Expected restructuring charges were about $9m pre-tax in Q4 2016 and $1m pre-tax in Q1 2017, primarily for software impairment, contract and lease terminations, severance and relocation. These are estimates, not reported Q3 charges.
- For 2016, planned net capital expenditures were $140m–$150m; depreciation and amortization was estimated at $100m–$105m. Management said planned capital spending could be adjusted to business levels and believed available liquidity would meet foreseeable needs.
- Management cited soft economic conditions, surplus transportation capacity, pricing pressure, labor and benefit costs, fuel-surcharge recovery, and seasonal or weather effects as operating risks. It also highlighted cybersecurity, self-insurance claims, acquisition integration and potential goodwill impairment risks.
- ABF Freight’s collective bargaining agreement runs through March 31, 2018. The Central States multiemployer pension plan was in critical and declining status and, absent legislative action, projected to become insolvent within 10 years or less. The company said its contribution rate was not expected to increase through the current contract term, but future obligations remain uncertain.
- Other contingencies include routine legal and environmental matters; the company reported a $0.6m environmental reserve and said routine legal matters were not expected to have a material adverse effect. It reported no material changes to risk factors and effective disclosure controls.
Most important facts for investors to verify
- Whether ABF Freight can recover pricing and improve tonnage, shipment weight and operating ratio amid excess market capacity.
- Whether labor, healthcare and casualty claim costs moderate, and the longer-term implications of multiemployer pension funding and contract negotiations.
- Whether the asset-light restructuring delivers the estimated $15m annualized savings and whether the projected charges and LDS contingent consideration change.
- Cash generation, capital spending, debt maturities and borrowing availability, particularly the $35m securitization borrowing due in January 2018.
- Whether management’s liquidity, capital expenditure and savings estimates remain consistent with subsequent filings and operating performance.