ArcBest Corporation (ARCB) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. The filing was signed November 8, 2019. ArcBest provides freight transportation and logistics services through Asset-Based, ArcBest (asset-light), and FleetNet operations.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $787.6 million | $826.2 million | $2,270.9 million | $2,319.5 million |
| Operating income | $31.2 million | $56.1 million | $75.0 million | $71.9 million |
| Net income | $16.3 million | $40.8 million | $45.5 million | $52.0 million |
| Diluted EPS | $0.62 | $1.52 | $1.72 | $1.94 |
| Operating margin | 4.0% | 6.8% | 3.3% | 3.1% |
| Operating cash flow | Not separately provided | Not separately provided | $138.0 million | $173.6 million |
Q3 revenue fell 4.7% year over year, while operating income declined 44.3% and net income 60.1%. For the nine months, revenue declined 2.1%; operating income rose 4.3%, but net income fell 12.4%. Nine-month 2018 operating income included a $37.9 million one-time withdrawal-liability charge, making the reported year-over-year operating-income increase an imperfect comparison.
- Asset-Based: Q3 revenue was $565.6 million, down 3.4%, and operating income was $31.7 million versus $50.2 million. Its operating ratio worsened to 94.4% from 91.4%. Tonnage per day fell 4.6%, partly offset by 1.5% higher billed revenue per hundredweight. For nine months, revenue increased 0.3% and operating income rose to $81.5 million from $66.9 million; the prior-year period included the $37.9 million pension charge.
- Asset-light operations: Combined Q3 revenue was $253.7 million, down 0.9%; nine-month revenue was $713.1 million, down 2.6%. ArcBest segment operating income fell to $2.5 million from $10.0 million in Q3 and to $6.3 million from $16.9 million for nine months, reflecting lower pricing and shipment activity amid increased truckload capacity. FleetNet revenue rose 6.9% in Q3 and 9.6% for nine months, principally on higher service-event volume.
- Adjusted EBITDA (non-GAAP): Consolidated adjusted EBITDA was $64.8 million in Q3 versus $88.3 million, and $171.8 million for nine months versus $200.6 million.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $183.8 million and short-term investments were $124.3 million, totaling $308.1 million; total was $297.0 million at December 31, 2018.
- Nine-month operating cash flow was $138.0 million, down $35.6 million. Investing activities used $90.5 million and financing activities used $53.8 million. Cash and cash equivalents ended at $183.8 million, down $6.3 million from year-end.
- Long-term debt was $298.4 million, including $70.0 million drawn on the revolving credit facility, $40.0 million under receivables securitization, and $188.3 million of notes payable. Cash plus short-term investments exceeded reported debt by approximately $9.7 million, before considering lease liabilities.
- Operating lease liabilities totaled $71.3 million, recognized following adoption of ASC 842 in 2019; the company recorded $67.4 million of operating right-of-use assets. This accounting adoption was described as noncash and without significant effect on results or cash flows.
- Available borrowing capacity was $180.0 million under the $250 million revolving facility and $72.8 million under the receivables securitization program. The revolving facility was extended to October 1, 2024; the company reported compliance with its debt covenants.
- Capital expenditures, including financed amounts, were estimated at $160–165 million for full-year 2019, net of asset sales. Nine-month cash purchases of property and equipment, net of financing, were $69.8 million; internally developed software capitalization was $8.5 million.
Material changes, outlook, and risks
- Q3 Asset-Based weakness reflected lower tonnage and shipment levels, softer market conditions, and smaller average shipments. Labor, maintenance, and pilot-program expenses pressured margins; lower purchased transportation costs provided some offset. October 2019 Asset-Based billed revenue per day was down approximately 7% year over year, with tonnage per day down approximately 9%.
- ArcBest cited increased truckload-market capacity and lower market pricing. October ArcBest segment revenue per day was down approximately 7% year over year. The company said elevated strategic costs for owner-operator and contract-carrier capacity would add approximately $0.5 million of ArcBest expense in Q4 versus Q4 2018.
- ABF Freight’s freight-handling technology pilot generated $4.7 million of Q3 and $9.2 million of nine-month expense. Management expected approximately $4.0 million in Q4 and $13.0 million for full-year 2019, versus approximately $4.0 million for 2018. The pilot remains limited in scope; success and expansion are not assured. ELD conversion costs were $1.8 million in Q3 and $2.4 million for nine months.
- Management expected the “Other and eliminations” loss to be approximately $8.0 million in Q4 and $24.0 million for full-year 2019, compared with $22.7 million in 2018. Full-year 2019 depreciation and amortization, excluding intangible amortization, was estimated at approximately $107 million.
- Management estimated a full-year 2019 effective tax rate of approximately 28%. The nine-month rate was 28.3%, compared with 18.4% in 2018; prior-year tax benefits included Tax Reform Act adjustments and an alternative-fuel tax credit.
- Q3 and nine-month results included a $4.0 million noncash pension termination expense, with no tax benefit, associated with settling the nonunion defined-benefit plan. The plan was substantially liquidated by September 30, 2019; completion was expected in 2019. The company also contributed $7.7 million in cash to the plan during Q3.
- Key risks include weaker economic activity, freight volumes and pricing, competition and truckload capacity, labor costs and retention, multiemployer pension exposure, pilot-program execution, cybersecurity and system disruptions, fuel and equipment costs, and potential impairment of ArcBest goodwill and intangible assets. The Central States Pension Plan was reported in critical and declining status; approximately half of ABF Freight’s multiemployer pension contributions go to that plan. The ABF labor agreement runs through June 30, 2023.
- Routine legal matters were not expected to have a material adverse effect, based on recorded amounts. The environmental cleanup reserve was $0.6 million. Management reported no material changes to risk factors since the 2018 Form 10-K and no material cybersecurity incident known to management.
Most important facts for investors to verify
- Whether Asset-Based tonnage and shipment declines, including the weaker October indicators, persist and how effectively pricing offsets them.
- Whether Asset-Based operating costs and productivity improve as volumes change, and whether the freight-handling pilot delivers measurable safety, service, or cost benefits.
- Whether ArcBest segment pricing and margins recover as truckload capacity and market pricing change.
- Actual full-year capital spending, cash conversion, and progress against management’s Q4 and full-year “Other and eliminations” estimates.
- Debt and liquidity after equipment financing, lease commitments, and multiemployer pension obligations; confirm covenant compliance and available facility capacity.
- Material pension-plan developments, particularly Central States funding and potential future contribution or withdrawal-liability exposure.