ArcBest Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. ArcBest provides freight transportation and integrated logistics through Asset-Based, ArcBest (asset-light), and FleetNet operations. Asset-Based generated about 70% of segment revenues before eliminations.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior balance-sheet date |
|---|---|---|
| Revenue | $701.4 million | $711.8 million; down 1.5% |
| Operating income | $7.8 million; 1.1% margin | $8.6 million; 1.2% margin |
| Net income / diluted EPS | $1.9 million / $0.07 | $4.9 million / $0.18 |
| Adjusted EBITDA (non-GAAP) | $36.5 million | $39.8 million |
| Operating cash flow | $23.1 million provided | $3.4 million used |
| Cash, cash equivalents and short-term investments | $531.0 million | $318.5 million at December 31, 2019 |
| Total debt, including current portion | $533.9 million | $323.5 million at December 31, 2019 |
| Current assets / current liabilities | $869.5 million / $422.9 million | $664.4 million / $444.3 million at December 31, 2019 |
Asset-Based revenue rose 1.9% to $515.7 million, while ArcBest segment revenue fell 4.9% to $164.8 million and FleetNet revenue fell 1.5% to $52.4 million. Asset-Based operating income was $13.2 million (versus $13.6 million); ArcBest recorded a $1.4 million operating loss (versus $1.7 million income); FleetNet operating income was $1.0 million (versus $1.5 million). Asset-Light combined operating results moved to a $0.4 million loss from $3.2 million income.
The effective tax rate was 20.3%, compared with 25.9%. The quarterly dividend was $0.08 per share in both periods; the board declared another $0.08 dividend on May 1, 2020. The company repurchased 150,000 shares for $3.2 million in Q1.
Material changes and drivers
- Revenue declined modestly, but net income fell 61% and diluted EPS decreased to $0.07. Consolidated operating income declined less sharply; lower non-operating results were a major contributor to the earnings decline.
- Asset-Based tonnage per day increased 4.6%, helped by larger shipments and one additional workday, while shipments per day declined 2.2% and billed revenue per hundredweight, including fuel surcharges, fell 4.3%. The segment operating ratio was 97.4%, compared with 97.3%.
- ArcBest’s operating margin weakened amid lower shipments and revenue per shipment and margin pressure: purchased transportation rose to 83.3% of segment revenue from 80.9%.
- Cash and investments increased primarily because ArcBest drew $180 million under its revolving credit facility and borrowed $45 million under its receivables securitization program. Q1 operating cash flow improved year over year, partly because of timing and lower cash outflows for operating liabilities.
- Other, net included a $3.8 million reduction in net income associated with changes in the cash surrender value of life-insurance policies. Freight-handling pilot technology costs were $4.6 million pre-tax, versus $2.8 million a year earlier.
Outlook, risks and unusual items
- COVID-19 had a limited effect on overall Q1 results, with disruption beginning in late March. The filing reported April 2020 per-day revenue declines versus April 2019 of approximately 21% for Asset-Based and 17% for ArcBest excluding FleetNet. Management said the pandemic’s duration and ultimate impact were uncertain.
- Management reduced planned 2020 net capital expenditures by about 30%, to $95–$105 million, and estimated 2020 depreciation and amortization at approximately $110 million. April cost actions included pay reductions for officers and nonunion employees, a hiring freeze, suspension of the nonunion 401(k) match, and lower discretionary spending. Management estimated $15–$20 million of Q2 expense reductions versus Q2 2019 if measures remained in place.
- Management expected “Other and eliminations” losses of approximately $4 million in Q2 and $20 million for full-year 2020. It cautioned that the Asset-Based Q2 operating-ratio comparison might deteriorate sequentially rather than follow the usual seasonal improvement. The filing did not provide formal earnings or revenue guidance.
- The company reported $250 million outstanding on its $250 million initial revolving facility, leaving no availability under that commitment, and $85 million outstanding under the securitization program, with $28 million available after letters of credit. It said cash, investments, operating cash flow and available securitization capacity were expected to be sufficient for operations and obligations. Credit-agreement covenants were met at quarter-end.
- Key risks include prolonged pandemic-related demand weakness, freight pricing and fuel-surcharge pressure, possible impairment of goodwill or indefinite-lived intangibles, labor and multiemployer pension obligations, and business-continuity and cybersecurity exposures. Management found no impairment of goodwill or indefinite-lived intangibles at March 31, based partly on assumptions of recovery beginning in late 2020 and strengthening in 2021.
- Other obligations include $106.2 million of purchase commitments and $85.2 million of operating lease payments, including imputed interest. The Central States multiemployer pension plan was reported in critical and declining status; withdrawal from certain plans could create material liabilities. Routine legal matters were not expected to have a material adverse effect; environmental reserves were $0.7 million.
- Management reported effective disclosure controls as of March 31, 2020. The $0.9 million uncertain-tax-position reserve was reversed after the statute of limitations expired.
Important facts for investors to verify
- How subsequent quarterly filings quantify pandemic-related volume, yield, margins and cash-flow effects against the severe April declines disclosed here.
- Whether the $531 million cash-and-investments position and remaining $28 million securitization capacity were sustained, and how debt balances, interest costs and covenant headroom evolved.
- Whether the $95–$105 million net capital-expenditure outlook and $15–$20 million Q2 cost-reduction estimate were achieved, and whether cost actions affected service or labor relations.
- Whether freight-handling pilot costs produced measurable benefits, and whether COVID-19 or weaker forecasts later triggered goodwill or intangible-asset impairment testing or charges.
- Developments in multiemployer pension exposure, environmental and self-insurance contingencies, and the board’s decisions on dividends and share repurchases.