ArcBest Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. ArcBest provides freight transportation and logistics services through Asset-Based, ArcBest (asset-light), and FleetNet segments. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $826.2 | $744.3 | $2,319.5 | $2,115.7 |
| Operating income | $56.1 | $26.7 | $71.9 | $42.6 |
| Operating margin | 6.8% | 3.6% | 3.1% | 2.0% |
| Net income | $40.8 | $14.8 | $52.0 | $23.2 |
| Diluted EPS | $1.52 | $0.56 | $1.94 | $0.87 |
| Operating cash flow | Not provided quarterly | $173.6 | $96.4 |
- Q3 revenue grew 11.0% and operating income more than doubled. For the nine-month period, revenue increased 9.6% and operating income rose 68.8%.
- Consolidated Adjusted EBITDA, a non-GAAP measure, was $88.3 million in Q3 versus $56.0 million; nine-month results were $200.6 million versus $131.2 million. The 2018 nine-month figure includes an adjustment for the $37.9 million pension withdrawal charge.
- Cash and cash equivalents were $177.4 million and short-term investments $75.9 million at September 30, totaling $253.3 million, up from $177.2 million at year-end 2017. Current assets were $631.6 million and current liabilities $454.9 million.
- Total debt was $290.5 million, up from $268.9 million at December 31, 2017; cash and short-term investments exceeded debt by approximately $37.2 million. Debt included $70.0 million under the credit facility, $45.0 million under receivables securitization, and $175.2 million of notes payable. Credit facility capacity was $130.0 million; securitization capacity was $62.4 million.
- Net capital expenditures were $39.2 million for the nine months, while $71.6 million of equipment purchases were financed. The company paid $6.2 million in dividends and repaid $50.0 million of long-term debt.
Segments and changes versus prior year
- Asset-Based: Q3 revenue increased 13.1% to $585.3 million; operating income was $50.2 million versus $23.7 million. Operating ratio improved to 91.4% from 95.4%. Nine-month operating income was $66.9 million and included the $37.9 million withdrawal-liability charge; excluding that charge, the nine-month operating ratio improved 3.8 percentage points year over year. Q3 billed revenue per hundredweight rose 10.1%, while tonnage per day rose 1.6%.
- ArcBest segment: Q3 revenue rose 5.0% to $205.4 million and operating income increased to $10.0 million from $7.8 million. Higher revenue per shipment reflected tight truckload capacity, but purchased-transportation costs pressured net revenue margin, which declined to 20.0% from 20.4%.
- FleetNet: Q3 revenue rose 27.6% to $50.5 million, primarily on higher service-event volume; operating income increased to $1.1 million from $0.9 million.
- The effective tax rate fell to 24.5% in Q3 and 18.4% for nine months, from 38.6% and 34.9%, respectively. 2018 results benefited from Tax Reform Act deferred-tax adjustments and, year to date, a $1.2 million alternative-fuel tax credit.
- Operating cash flow increased by $77.2 million year over year for nine months, reflecting improved results and working-capital changes. The filing also reports a $22.7 million operating cash-flow benefit from the accrued multiemployer withdrawal liability, alongside cash payments toward that liability.
Outlook, commentary and risks
- Management expected the “Other and eliminations” operating loss to be approximately $6.0 million in Q4 and $21.5 million for full-year 2018. Estimated 2018 net capital expenditures were $145–$150 million, net of asset sales; depreciation and amortization excluding intangible amortization was estimated at approximately $105 million.
- October 2018 Asset-Based billed revenue per day was approximately 11% above October 2017, with revenue per hundredweight up about 9% and tonnage per day up about 2%. Combined Asset-Light revenue per day increased approximately 6%. These are management-reported preliminary trends, not full-quarter guidance.
- The 2018 ABF labor agreement runs through June 30, 2023. Wage and benefit costs, including vacation restoration and ratification bonuses, were estimated to rise approximately 2.0% annually on a compounded basis. Profit-sharing bonuses may apply if the Asset-Based segment achieves an annual operating ratio of 96.0% or better.
- Termination of the nonunion pension plan was expected to result in $15–$21 million of noncash settlement charges, partly in Q4 2018 and partly in Q1 2019, and approximately $13 million of cash funding in Q1 2019. Amounts depend on participant elections, interest rates, plan assets and annuity costs.
- Key risks include fuel-price volatility and fuel-surcharge recovery, pricing and capacity competition, labor and multiemployer pension obligations, economic and shipment-volume changes, self-insurance claims, weather, cybersecurity and systems disruption, and execution of growth and technology investments. The Central States pension plan was in critical and declining status; withdrawal from certain multiemployer plans could create material liabilities.
- Management stated liquidity sources should be sufficient for foreseeable needs and that the company was in compliance with financing covenants. The company expected to adopt lease accounting in 2019 and anticipated a material increase in balance-sheet assets and liabilities, with minimal income-statement and no cash-flow impact.
- Routine legal matters were not expected to materially affect results; environmental cleanup reserves were $0.6 million. Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile reported and adjusted performance, especially the $37.9 million New England pension withdrawal charge and the non-GAAP Adjusted EBITDA adjustments.
- Assess whether Asset-Based pricing and operating-ratio improvement can persist amid fuel costs, purchased transportation usage, labor-cost increases and shipment trends.
- Track ArcBest segment margins and purchased-transportation costs as truckload capacity and pricing conditions change.
- Monitor the final pension termination charges and cash contribution, as well as payments under the 23-year New England withdrawal-liability arrangement.
- Confirm capital spending, equipment financing, debt levels and liquidity after the expected Q4 and 2019 pension and lease-accounting effects.