ArcBest Corporation (NASDAQ: ARCB) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Comparisons are year over year unless otherwise stated. Financial amounts are in U.S. dollars; figures are rounded. FleetNet, sold February 28, 2023, is presented as discontinued operations, with prior periods reclassified.
Business context and results
ArcBest operates Asset-Based less-than-truckload freight services and Asset-Light logistics services. Management attributed weaker results mainly to soft freight markets, greater available capacity, lower market rates and lower fuel surcharge revenue.
| Continuing operations | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $1,103.5M | $1,321.7M | $2,209.6M | $2,589.8M |
| Operating income | $42.1M | $136.0M | $63.3M | $229.0M |
| Net income from continuing operations | $39.6M | $101.5M | $58.4M | $169.6M |
| Diluted EPS from continuing operations | $1.60 | $3.97 | $2.35 | $6.58 |
| Operating margin | 3.8% | 10.3% | 2.9% | 8.8% |
Q2 revenue declined 16.5%, operating income 69.0%, and continuing-operations diluted EPS 59.7%. Consolidated Q2 net income was $40.4M, including $0.8M from discontinued operations. First-half net income was $111.7M, including $53.3M from discontinued operations, principally FleetNet’s $52.3M after-tax sale gain. Thus, total net income and EPS comparisons include a material divestiture-related item.
Segments and operating drivers
- Asset-Based: Q2 revenue was $722.0M, down 10.0%; operating income was $43.3M versus $116.7M. Operating ratio worsened to 94.0% from 85.5%. Shipments per day rose 4.2%, but billed revenue per hundredweight including fuel surcharges fell 11.0%; labor expense and weaker revenue weighed on margins.
- Asset-Light: Q2 revenue was $409.8M, down 25.4%; operating income was $13.2M versus $27.5M. Revenue per shipment fell 30.0%, partly offset by a 3.5% increase in shipments per day. Q2 results included a $10.0M reduction in MoLo earnout expense; first-half Asset-Light reported an operating loss of $0.9M.
- Q2 consolidated results included $14.8M of pre-tax innovative technology costs. Management reported that Vaux hardware pilots at two ABF locations would pause in Q3 to refocus on operational training; the software and customer-site pilots were to continue.
Cash flow, liquidity and capital
- For the six months, net cash provided by operating activities was $103.8M versus $184.6M. The cash flow statement includes discontinued-operation cash flows, which were not separately segregated there. Capital spending on property and equipment, net of financings, was $83.2M; financing activities used $105.3M.
- At June 30, cash and cash equivalents were $187.3M and short-term investments were $153.1M, totaling $340.4M. Current assets were $865.2M and current liabilities $641.3M.
- Total debt was $233.0M, including $50.0M drawn on the revolving facility; cash and short-term investments exceeded debt by approximately $107.4M. The company reported $200.0M of available revolver capacity and $40.0M available under its receivables securitization program. It said it was in compliance with financing covenants.
- Operating lease liabilities, current and long term, totaled $205.2M on the balance sheet. Debt and leases are distinct obligations.
- 2023 capital expenditures were estimated at $270M–$295M, net of asset sales, including approximately $165M for revenue equipment. Management said existing liquidity, operating cash generation and borrowing capacity should be sufficient for anticipated operating needs, investment, debt repayment and earnout payments.
Outlook, material events and risks
- No specific earnings or revenue guidance is provided in the supplied filing text. Management described ongoing uncertainty from soft demand, available freight capacity, pricing pressure, inflation, interest rates and geopolitical conditions, and cautioned that interim results may be affected by seasonality.
- The new five-year ABF labor agreement was implemented July 16, effective retroactively July 1, 2023. Contractual wage and benefit top hourly rates are estimated to rise about 4.2% compounded annually through June 2028; the agreement also provides for potential profit-sharing and expanded paid time off.
- A large LTL competitor ceased operations on July 30, after quarter-end. ArcBest said near-term market disruption and shipment redistribution could create an opportunity, but additional revenue could be offset by service costs and the company gave no assurance that pricing would support higher volumes.
- MoLo contingent earnout liability was $117.0M at June 30. The company did not expect the 2023 target to be met, but cumulative payments may still become due through 2025 if applicable targets are achieved. The liability depends on estimates and Level 3 valuation inputs.
- A pre-acquisition MoLo carrier accident lawsuit presents a reasonably possible loss that could be material; the company said it could not estimate a loss range. A $0.5M EPA civil penalty and compliance measures relate to a Clean Water Act consent decree. The company also disputes state sales-and-use-tax assessments; management did not expect their resolution to have a material adverse effect.
- Other stated risks include potential goodwill or intangible-asset impairment if business conditions worsen, fuel and labor cost pressures, equipment availability and expense, cybersecurity or systems disruption, and weather and climate-related impacts. Management reported disclosure controls were effective and no material change in internal controls.
Important facts for investors to verify
- Whether freight demand and pricing stabilize, and whether shipment growth can translate into revenue and margins.
- How the new ABF labor agreement affects labor, pension and health-benefit costs, and whether productivity offsets those increases.
- Whether competitor-exit volume can be served profitably, rather than merely increasing shipment counts and operating costs.
- Underlying Asset-Light performance excluding the $10.0M Q2 earnout remeasurement benefit, and the assumptions behind the remaining $117.0M earnout liability.
- Cash conversion and capital spending against the $270M–$295M annual estimate, plus the timing and availability of financing capacity.
- Developments in the MoLo accident litigation, tax assessments, and any impairment indicators for Asset-Light goodwill and intangible assets.