ArcBest Corporation (NASDAQ: ARCB) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results are compared with the corresponding 2019 periods. ArcBest provides freight transportation and logistics services through Asset-Based, ArcBest (asset-light), and FleetNet segments.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $795.0 million | $787.6 million | $2,123.7 million | $2,270.9 million |
| Operating income | $39.8 million | $31.2 million | $68.0 million | $75.0 million |
| Net income | $29.4 million | $16.3 million | $47.2 million | $45.5 million |
| Diluted EPS | $1.11 | $0.62 | $1.79 | $1.72 |
| Operating margin | 5.0% | 4.0% | 3.2% | 3.3% |
- Q3 revenue grew 0.9% year over year, while nine-month revenue fell 6.5%. Management attributed the year-to-date decline chiefly to pandemic-related demand weakness in Q2.
- Q3 operating income increased about 27%; nine-month operating income declined about 9%. Q3 net income rose about 81%, while nine-month net income increased about 4%.
- Operating cash flow was $151.3 million for the first nine months, versus $138.0 million in 2019. Investing activities provided $12.5 million, compared with $90.5 million used in the prior-year period; financing activities used $98.1 million, versus $53.8 million.
- At September 30, cash and cash equivalents were $267.6 million and short-term investments were $83.4 million. Total debt was $291.9 million; the company reported a $59.1 million net cash position after debt. Available borrowing capacity was $180.0 million under the revolver and $113.3 million under the receivables securitization program.
- Current assets were $730.2 million and current liabilities $497.5 million. Total assets were $1.746 billion and stockholders’ equity $802.6 million.
- Quarterly dividends remained $0.08 per share. The company repurchased 227,460 shares for $5.7 million during the first nine months.
Segments and material changes
- Asset-Based: Q3 revenue was $561.9 million, down 0.7%; operating income was $36.6 million, up from $31.7 million. The operating ratio improved to 93.5% from 94.4%. Year-to-date revenue fell 5.7% and operating income fell to $70.9 million from $81.5 million; the nine-month operating ratio worsened to 95.4% from 95.0%.
- ArcBest: Q3 revenue rose 8.8% to $217.3 million and operating income rose to $4.8 million from $2.5 million. For nine months, revenue declined 3.7% to $533.5 million and operating income declined to $4.7 million from $6.3 million. Higher purchased-transportation costs pressured margins.
- FleetNet: Q3 revenue decreased 6.4% to $50.5 million and operating income was $1.0 million, versus $1.2 million. Nine-month revenue and operating income also declined, to $149.4 million and $2.8 million, respectively.
- Consolidated Adjusted EBITDA, a non-GAAP measure, was $74.8 million in Q3 versus $64.8 million; nine-month Adjusted EBITDA was $167.2 million versus $171.8 million.
- Asset-Based daily tonnage increased 1.2% in Q3 but declined 2.9% for the first nine months. ArcBest shipments per day, excluding managed transportation, declined 0.4% in Q3 and 11.1% year to date.
Outlook, commentary, and risks
- Management said business levels improved in Q3 and that October trends continued to strengthen: preliminary Asset-Based billed revenue per day was up about 9% year over year, and ArcBest segment revenue per day was up about 31%. These are preliminary October results, not formal full-year guidance.
- 2020 net capital expenditures were expected to be $90–$95 million, after a roughly 30% reduction to the plan; 2020 depreciation and amortization was estimated at approximately $110 million. Management expected “Other and eliminations” losses of about $3 million in Q4 and about $13 million for full-year 2020.
- The company expected approximately $11 million of one-time discretionary payments to nonunion personnel in Q4. It accrued $7 million in Q3 based on the probability of payment.
- Management said cash, investments, operating cash generation, and available borrowing facilities should be sufficient for operating needs, technology investment, and debt repayment. It repaid pandemic-related revolver and securitization borrowings during Q3.
- COVID-19 remained a material uncertainty for shipment volumes, pricing, customer finances, supply chains, and cash flows. Management cautioned that cost adjustments may not track changes in demand and that future results could be adversely affected.
- Other notable risks include competition and pricing pressure, fuel surcharge recovery, labor costs and collective bargaining, cybersecurity and business continuity, and possible impairment of goodwill or intangibles if recovery assumptions weaken. Goodwill and indefinite-lived intangibles were not considered impaired at September 30, based on management’s recovery assumptions.
- ABF Freight’s Central States multiemployer pension plan was reported in critical and declining status; a separate pension fund representing about 2% of 2019 ABF multiemployer pension contributions was expected to become insolvent in April 2021. The filing says withdrawal from certain multiemployer plans could create material liabilities.
- Routine legal matters were not expected to have a material adverse effect; the environmental cleanup reserve was $0.5 million. The company reported compliance with credit agreement covenants.
Key facts for investors to verify
- Whether the Q3 and October recovery in volumes and revenue continued, particularly given ongoing pandemic and economic uncertainty.
- Whether higher purchased-transportation costs, freight mix, fuel surcharges, and pricing affect margins in subsequent periods.
- Whether projected capital spending, depreciation, Q4 discretionary payments, and “Other and eliminations” costs matched subsequent results.
- Debt maturities, borrowing availability, and liquidity needs, including equipment financing and lease obligations.
- Potential exposure from multiemployer pension plans and the sensitivity of goodwill and intangible-asset valuations to management’s economic recovery assumptions.