ArcBest Corporation (ARCB) — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. ArcBest, formerly Arkansas Best Corporation, changed its name and began trading under ticker ARCB on May 1, 2014. Its businesses include asset-based ABF Freight and four non-asset-based logistics and services segments.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $658.6m | $576.9m | $1,236.6m | $1,097.6m |
| Operating income (loss) | $27.0m | $8.4m | $18.3m | ($14.9m) |
| Operating margin | 4.1% | 1.5% | 1.5% | (1.4%) |
| Net income (loss) | $17.2m | $4.9m | $12.0m | ($8.5m) |
| Diluted EPS | $0.63 | $0.18 | $0.44 | ($0.33) |
| Operating cash flow | Not presented quarterly | $57.6m | $27.9m |
- Revenue and profit: Revenue rose 14.2% in Q2 and 12.7% year to date. All segments reported revenue growth. Management attributed the improved operating results primarily to higher revenue and ABF Freight cost reductions under its new labor agreement.
- Margins: ABF Freight’s operating ratio improved to 95.4% in Q2 from 98.8%; for the first six months it was 98.8%, versus 102.0%. Consolidated Q2 operating margin increased to 4.1% from 1.5%.
- Cash flow and liquidity: First-half operating cash flow increased $29.7m year over year. At June 30, unrestricted cash, cash equivalents and short-term investments totaled $165.2m; restricted funds were $1.4m. Cash and equivalents alone were $129.2m. Current assets were $477.2m and current liabilities $360.7m.
- Debt: Reported long-term debt, including current portion, was $119.2m, compared with $112.8m at year-end 2013. This included a $77.5m term loan and $36.9m in notes payable. The company repaid $16.5m of long-term debt during the first half and financed $22.8m of revenue equipment through promissory notes. Term-loan covenants were met.
- Capital returns: Dividends declared were $0.03 per share per quarter. No share repurchases occurred in the first half; $18.2m remained available under the repurchase authorization.
Material changes and operating drivers
- ABF Freight revenue grew 10.3% in Q2 and 7.9% in the first half. Tonnage per day rose 6.0% and 5.3%, respectively; billed revenue per hundredweight, including fuel surcharges, increased 4.2% and 2.6%.
- Non-asset-based businesses grew a combined 28.2% in Q2 and 29.5% year to date. Panther operating income rose to $4.4m in Q2 and $7.7m for the half-year; ABF Logistics revenue grew 46.3% and 42.1%, respectively.
- Severe winter weather hurt first-quarter operations; ABF Freight estimated a $10.5m adverse impact. Higher revenue, improved pricing, labor-agreement savings and network changes helped offset this and other cost pressures.
- ABF Freight consolidated 22 terminals in the first quarter, following eight consolidations in the second half of 2013; it reported 247 service facilities afterward. Management expects ongoing expense savings, but gave no quantified estimate.
Outlook, risks and unusual items
- Outlook: The filing provides no formal earnings or revenue guidance. Management estimated 2014 capital expenditures, net of asset-sale proceeds, at $90m–$100m, including about $60m for ABF Freight equipment replacements; depreciation and amortization was estimated at $85m–$90m. Management expected available liquidity and operating cash flow to meet foreseeable needs.
- Management expected pension settlement expense of $1m–$2m in each of Q3 and Q4 2014; actual charges depend on lump-sum distributions, asset returns and discount rates. First-half settlement expense was $4.6m pre-tax. Long-term incentive plan expense was $3.1m pre-tax for the half-year, versus $0.6m a year earlier.
- ABF Freight’s collective bargaining agreement runs through March 2018. The filing estimates combined contractual wage and benefit contribution rates will rise about 2.5%–3.0% compounded annually through the agreement’s end. Approximately half of ABF Freight’s multiemployer pension contributions go to the Central States plan, which was reported 47.6% funded as of January 1, 2013 and remained in critical status in 2014.
- The $75m receivables securitization facility had no borrowings and $57.5m available after letters of credit; it matures June 15, 2015, and the company was negotiating an extension. The company also reported $58.6m of available letter-of-credit issuance capacity.
- A citizens group sued ABF Freight over alleged storm-water permit violations at its Kent, Washington facility, seeking fines and injunctive relief. The case was at an early stage; loss likelihood and amount were not determinable, and no liability was recorded. The company reported a separate $0.9m reserve for identified environmental cleanup costs.
- Other risks discussed include competitive pricing and fuel-surcharge recovery, labor and multiemployer benefit costs, equipment maintenance and replacement costs, weather, cybersecurity and potential impairment of Panther goodwill or intangibles. Management reported no material cybersecurity incident and no material change in risk factors.
Important facts for investors to verify
- Whether ABF Freight’s tonnage and pricing improvements persist and offset wage, benefit, fuel, maintenance and equipment costs.
- Progress on extending the receivables securitization facility before its June 2015 maturity, and ongoing covenant compliance.
- Actual pension settlement charges, future multiemployer plan contribution requirements and the condition of the Central States plan.
- Final outcome and potential financial exposure from the Kent storm-water litigation.
- Whether capital spending, equipment financing and planned headquarters construction remain consistent with liquidity expectations and business conditions.