ArcBest Corporation (NASDAQ: ARCB) — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; filed November 8, 2017. ArcBest provides freight transportation and logistics services through its Asset-Based, ArcBest (asset-light logistics), and FleetNet segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $744.3 | $713.9 | $2,115.7 | $2,012.0 |
| Operating income | $24.3 | $20.4 | $36.8 | $27.8 |
| Operating margin | 3.3% | 2.9% | 1.7% | 1.4% |
| Net income | $14.8 | $12.9 | $23.2 | $17.1 |
| Diluted EPS | $0.56 | $0.49 | $0.87 | $0.64 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $98.3 | $89.3 |
Q3 revenue grew 4.3%, operating income 19.5%, and net income 14.3% year over year. For the nine-month period, revenue rose 5.2%, operating income 32.6%, and net income 35.7%. Adjusted EBITDA, a company-defined non-GAAP measure, was $56.0 million for Q3 versus $51.7 million and $131.2 million for the nine months versus $119.8 million.
Segments and operating trends
- Asset-Based: Q3 revenue was $517.4 million, up 1.7%; operating income was $21.8 million versus $18.1 million. Revenue per hundredweight including fuel surcharges rose 6.6%, while daily tonnage fell 3.0%. Hurricanes reduced Q3 operating income by approximately $1.0 million. Nine-month revenue increased 4.3% and operating income rose to $33.9 million from $26.4 million.
- ArcBest: Q3 revenue increased 14.5% to $195.7 million and operating income rose to $7.6 million from $6.3 million. Growth reflected LDS acquisition contributions and stronger Expedite activity. Net revenue margin declined to 20.4% from 22.3%, as purchased transportation costs increased faster than customer rates amid tighter truckload capacity.
- FleetNet: Q3 revenue increased 1.3% to $39.6 million and operating income was $0.9 million versus $0.1 million. Nine-month revenue declined 6.5%, while operating income improved to $2.6 million from $1.7 million.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $109.0 million and short-term investments were $57.1 million, totaling $166.1 million, down from $171.1 million at December 31, 2016. Current assets were $519.0 million versus current liabilities of $413.3 million.
- Total debt was $263.0 million, including $70.0 million drawn on the revolving credit facility, $45.0 million under the receivables securitization program, and $147.5 million of notes payable. Debt was $243.7 million at year-end 2016. The company reported compliance with financing covenants. Revolver maturity was extended to July 2022; securitization capacity was increased to $125 million, with $61 million available after outstanding letters of credit.
- Nine-month investing cash outflow was $48.3 million and financing cash outflow was $56.2 million. Net purchases of property and equipment were $44.4 million; a further $61.6 million of equipment purchases was financed. The company paid $6.2 million in dividends and repurchased $6.0 million of stock.
- Management estimated 2017 net capital expenditures, including financed amounts and net of asset sales, of $150–$165 million, and depreciation and amortization of $100–$105 million.
Management outlook, material developments and risks
- Management said improved revenue, cost management, and yield initiatives supported higher operating income. Hurricanes disrupted Asset-Based operations. October 2017 Asset-Based billed revenue per day was approximately 3% above October 2016, with revenue per hundredweight up about 7% and daily tonnage down about 3%; management cautioned that these trends may not continue.
- Management estimated Q4 2017 nonunion pension expense, including settlements, at approximately $2.0 million; restructuring charges of about $0.5 million remained expected for 2017. The “Other and eliminations” operating loss was expected to be approximately $5.5 million in Q4.
- The board authorized steps to terminate the frozen nonunion defined benefit pension plan, with a proposed December 31, 2017 termination date. Management estimated approximately $10 million of cash funding and $20 million of noncash settlement charges in 2018, subject to participant elections, interest rates, asset values, and final actuarial calculations.
- Asset-Based labor negotiations for a successor to the Teamsters agreement, which expires March 31, 2018, were expected to begin in Q1 2018. Risks include multiemployer pension exposure: the Central States plan was in critical and declining status, and management said insolvency was projected within 10 years absent legislative action. Withdrawal from certain plans could create material liabilities.
- Other key risks include fuel-price and surcharge recovery, pricing competition and customer acceptance of space-based pricing, weather and economic demand, labor costs, third-party capacity, self-insurance claims, cybersecurity and systems disruption, and environmental or legal matters. Management stated routine legal matters were not expected to have a material adverse effect; recorded environmental reserves were $0.4 million.
- The company expected to adopt revenue recognition standard ASC 606 on January 1, 2018 using the modified retrospective method. Management did not expect a significant consolidated financial impact; ArcBest segment revenue recognition was expected to shift to a relative-transit-time basis from recognition at final delivery.
Important facts for investors to verify
- Whether Asset-Based pricing gains and revenue per hundredweight can offset continued tonnage weakness, wage and benefit increases, and fuel-cost changes.
- Progress and terms of the Teamsters negotiations before the March 31, 2018 contract expiration, and developments in the Central States and other multiemployer pension plans.
- The final cost, cash funding requirement, timing, and settlement charges associated with terminating the nonunion pension plan.
- ArcBest segment margin performance as purchased transportation costs and capacity conditions evolve, and the contribution of LDS to growth and profitability.
- Execution of the stated capital expenditure plan and the impact of increased debt, pension obligations, and liquidity usage on cash generation and capital returns.