ArcBest Corporation — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. Amounts are in U.S. dollars unless otherwise noted.
Business context
ArcBest provides freight transportation and logistics through three segments: Asset-Based (ABF Freight less-than-truckload services), ArcBest (asset-light logistics), and FleetNet (commercial vehicle maintenance and roadside services). Asset-Based generated about 69% of segment revenues before other revenues and eliminations; the combined asset-light operations generated about 31%. No customer represented more than 3% of consolidated revenue.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $3,093.8 million | $2,826.5 million |
| Operating income | $109.1 million | $61.3 million |
| Operating margin | 3.5% | 2.2% |
| Net income | $67.3 million | $59.7 million |
| Diluted EPS | $2.51 | $2.25 |
| Cash provided by operating activities | $255.3 million | $151.9 million |
| Cash, cash equivalents and short-term investments | $297.0 million | $177.2 million |
| Total debt, including capital leases | $291.7 million | $268.9 million |
Revenue rose 9.5%; operating income increased 77.8% and net income increased 12.6%. The effective tax rate was 20.3%, compared with a tax benefit rate of 15.8% in 2017. Current assets were $649.2 million and current liabilities $451.3 million at year-end. Available borrowing capacity was $130.0 million under the revolving credit facility and $68.4 million under the receivables securitization program. The company reported compliance with financing covenants.
Capital expenditures, net of asset-sale proceeds, were $39.7 million; an additional $94.0 million of equipment and other purchases were financed. The company paid $8.2 million in dividends and repurchased $9.4 million of shares during 2018.
Material changes and segment results
- Fourth quarter: Revenue was $774.3 million versus $710.7 million a year earlier. Operating income was $37.2 million versus $18.7 million; net income was $15.3 million versus $36.6 million, and diluted EPS was $0.57 versus $1.37. The comparison is affected by a $25.8 million tax benefit recognized in fourth-quarter 2017 and higher pension settlement expense in fourth-quarter 2018.
- Asset-Based: Revenue increased 9.1% to $2,175.6 million. Daily tonnage was essentially flat; billed revenue per hundredweight, including fuel surcharges, rose 9.2%. Operating income was $103.9 million, versus $57.9 million, and the operating ratio improved to 95.2% from 97.1%. The 2018 ratio includes a 1.7-point impact from the one-time pension withdrawal charge; excluding that charge, the ratio was 93.5%.
- ArcBest segment: Revenue increased 10.5% to $781.1 million, while operating income rose to $23.6 million from $19.5 million. Net revenue (a company-defined non-GAAP measure) rose 4.5% to $149.6 million, but net revenue margin declined to 19.2% from 20.3%, as purchased transportation costs rose faster than customer pricing amid tight truckload capacity.
- FleetNet: Revenue increased 24.8% to $195.1 million, primarily on higher service-event volume; operating income rose to $4.4 million from $3.5 million.
Outlook, unusual items and risks
- Management estimated 2019 capital expenditures, net of asset sales, of $170–$180 million, including about $90 million for revenue equipment; 2019 depreciation and amortization, excluding intangible amortization, was estimated at $110–$115 million. Planned spending may be adjusted to business conditions.
- Management estimated first-quarter 2019 nonunion pension expense, including settlement charges, of about $4 million and cash funding of about $7 million; both estimates depend on benefit elections, asset values and annuity pricing. Plan settlement was expected to be completed in the first quarter.
- In 2018, ABF Freight recorded a $37.9 million pretax charge for withdrawal liability related to a New England pension-fund transition. It paid $15.1 million initially; remaining payments are scheduled over 23 years. The transition lowered the future contribution rate for that fund, but does not eliminate broader multiemployer-plan exposure. About half of ABF Freight’s multiemployer pension contributions went to the Central States plan, which was reported as critical and declining and projected to become insolvent within 10 years or less absent legislative action.
- The 2018 ABF labor agreement runs through June 30, 2023. Contractual wage and benefit costs, including vacation restoration and ratification bonuses, were estimated to increase about 2.0% compounded annually over the agreement, with possible additional profit-sharing costs.
- Management expected the loss in “Other and eliminations” to be about $7.5 million in first-quarter 2019 and about $25 million for full-year 2019, reflecting shared services, technology investment and other corporate costs.
- Early-2019 operating indicators were mixed: Asset-Based billed revenue per day through late February was up about 5%, while tonnage was down about 1.5%; ArcBest asset-light revenue per day was down about 3%, with weaker expedite yield as truckload capacity became more balanced.
- Principal risks include economic and freight-volume cycles, pricing competition, fuel and purchased-transportation costs, labor availability and union costs, underfunded multiemployer pensions, customer retention, cybersecurity and technology execution, regulatory and environmental compliance, claims and insurance costs, and weather-related disruption. Routine legal matters were not expected to have a material adverse effect; environmental cleanup reserves were $0.6 million at year-end.
Important facts for investors to verify
- How much of improved earnings and cash generation is sustainable after adjusting for the $37.9 million pension withdrawal charge, nonunion pension settlements, incentive costs and tax-related items?
- Whether Asset-Based yield improvements can continue without further material tonnage weakness, and how fuel surcharges and shipment mix affect underlying pricing.
- Whether ArcBest can restore net revenue margin as truckload capacity and purchased-transportation prices change, while converting managed-transportation growth into operating profit.
- The eventual cost and cash funding required to complete the nonunion pension-plan termination, and the longer-term contribution and withdrawal-liability exposure from multiemployer plans.
- Execution of the $170–$180 million 2019 capital plan, financing needs, and the impact of recognizing operating lease assets and liabilities under the new lease standard.