ArcBest Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results; amounts below are in millions of dollars unless noted. ArcBest provides freight transportation and logistics services; ABF Freight generated about 71% of first-half revenue before eliminations.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $696.1 | $658.6 | $1,309.4 | $1,236.6 |
| Operating income | $33.5 | $27.0 | $34.7 | $18.3 |
| Net income | $20.0 | $17.2 | $20.7 | $12.0 |
| Diluted EPS | $0.74 | $0.63 | $0.77 | $0.44 |
| Operating margin | 4.8% | 4.1% | 2.7% | 1.5% |
Q2 revenue rose 5.7% and net income 16.0% year over year; first-half revenue rose 5.9% and net income 72.4%. First-half operating cash flow was $74.7, up from $57.6. Investing activities used $48.6, including $34.2 of net property and equipment purchases, $5.2 for an acquisition, and $4.1 for internally developed software. Financing provided $9.0. Cash and cash equivalents ended June at $192.0.
Cash, short-term investments and restricted cash totaled $247.2; unrestricted cash and short-term investments were $245.9. Total debt was $160.8, versus $127.7 at year-end 2014. The company reported current assets of $561.9 and current liabilities of $364.5. It said available liquidity and operating cash flow should meet needs for the foreseeable future.
Material changes and operating drivers
- ABF Freight revenue increased 2.3% per day in Q2 and 3.0% in the first half. Its operating ratio improved to 94.4% for Q2 and 97.0% for the first half, from 95.4% and 98.8%, respectively. Tonnage and yield improved, while lower fuel surcharges reduced revenue.
- Asset-light logistics businesses grew combined revenue 15.1% in Q2 and 15.5% in the first half. ABF Logistics revenue rose 42.1% and 50.0%, respectively, reflecting customer growth and the Smart Lines acquisition. FleetNet and ABF Moving also grew; Panther’s first-half operating income declined amid higher healthcare and casualty claims.
- Consolidated results benefited from higher revenue, improved margins, lower fuel costs, and lower pension settlement expense year over year. Higher nonunion healthcare claims costs—up $2.6 in Q2 and $5.4 in the first half—partly offset these benefits. The 2014 comparison also included a tax benefit from reversal of a foreign tax-credit valuation allowance.
- ArcBest acquired truckload brokerage firm Smart Lines in January 2015 for $5.2 net cash consideration. It also repurchased 163,233 shares for $6.0 in the first half; $12.2 remained under the repurchase authorization.
Outlook, risks and contingencies
- Management estimated 2015 net capital expenditures of about $190, including $110 for revenue equipment and about $45 for real estate projects; it estimated depreciation and amortization of $90–$95. Capital spending may be adjusted to business levels.
- Management expected quarterly pension settlement expense of approximately $1.0 for the remainder of 2015, subject to lump-sum distributions, plan-asset returns and discount-rate changes. A July 28 dividend of $0.06 per share was declared.
- July ABF Freight revenue was about 1% lower per day year over year, with daily tonnage down 1%–2%; management cautioned that recent pricing improvement may not continue. Seasonal patterns, weather, economic conditions, competitive pricing and fuel-surcharge recovery may affect results.
- ABF Freight’s collective bargaining agreement runs through March 2018. About 79% of its employees were covered; contractual wage and benefit contribution rates are expected to rise over the agreement period. The Central States multiemployer pension plan was reported in critical and declining status, and management cannot determine future contribution requirements under future labor agreements.
- Debt facilities were amended or extended in 2015. At June 30, $70.0 was outstanding under the $150.0 revolving credit facility and $35.0 under the receivables securitization program; the company was in covenant compliance. Securitization borrowing capacity was $44.6 after letters of credit.
- Contingencies include Clean Water Act suits concerning ABF Freight facilities in Kent, Washington, and Brooklyn, New York, and a trademark suit against Panther. Outcomes and potential losses were not estimable; no liabilities were recorded for these matters. Environmental cleanup reserves were $0.8.
- Other stated risks include multiemployer pension exposure, labor and healthcare costs, fuel-price and surcharge volatility, cybersecurity, equipment and capital costs, and possible impairment of Panther goodwill and intangibles. No material changes to reported risk factors were disclosed.
Important facts for investors to verify
- Whether ABF Freight’s July tonnage weakness persisted and whether yield and fuel-surcharge trends supported margins.
- Developments in Central States’ critical-and-declining status and potential future contribution obligations.
- Execution, timing and funding of the $190.0 capital spending plan and associated equipment financing.
- Subsequent developments, if any, in the environmental and trademark proceedings and related self-insurance claims.
- Whether growth in asset-light segments translates into sustained operating income, particularly given healthcare and casualty claims.