ArcBest Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. ArcBest provides freight transportation and integrated logistics services through its Asset-Based, ArcBest (asset-light logistics), and FleetNet segments. The first quarter is typically seasonally weaker. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $651.1 | $621.5; up 4.8% |
| Operating loss | $(12.3) | $(9.3) |
| Operating margin | Approximately (1.9%) | Approximately (1.5%) |
| Net loss | $(7.4) | $(6.1) |
| Loss per diluted share | $(0.29) | $(0.24) |
| Cash from operations | $1.8 | $12.3 |
| Capital expenditures, net of asset-sale proceeds | $10.6 | $10.9 |
| Adjusted EBITDA (non-GAAP) | $20.5 | $20.4 |
Revenue increased, but operating and net losses widened. The effective tax benefit rate was 41.4%, compared with 37.4% in Q1 2016. Declining operating cash flow primarily reflected lower operating results and working-capital changes.
- Segment results: Asset-Based revenue was $464.4 million, up 5.8%, with a $10.0 million operating loss versus $9.0 million. ArcBest segment revenue was $152.9 million, up 7.4%, and operating income was $0.9 million versus approximately breakeven; growth included the acquired LDS business. FleetNet revenue declined 7.6% to $40.2 million, while operating income was relatively unchanged at $1.0 million.
- Asset-Based activity and pricing: Revenue per hundredweight, including fuel surcharges, rose 6.3%; shipments per day increased 5.7%, but tonnage per day declined 0.7% and weight per shipment fell 6.0%. Its operating ratio was 102.2%, compared with 102.0%.
- Balance sheet at March 31: Cash and cash equivalents were $82.3 million and short-term investments $57.0 million, for $139.2 million in unrestricted cash and investments. Current assets were $464.1 million against current liabilities of $381.6 million. Total debt was $227.1 million, down from $243.7 million at year-end 2016. Stockholders’ equity was $591.7 million.
- Cash movement: Cash, cash equivalents, and restricted cash decreased $32.0 million in the quarter to $83.2 million. The company paid $17.3 million of long-term debt and $2.1 million of dividends. The declared quarterly dividend was $0.08 per share.
Material changes and notable items
- The company unified sales, pricing, customer service, marketing, and capacity sourcing under a new corporate structure effective January 1, 2017. Q1 restructuring charges were $1.6 million, primarily employee-related; the company estimated approximately $1.0 million more for the remainder of 2017.
- Q1 pension settlement expense was $2.0 million, versus $0.9 million a year earlier, including an annuity purchase and lump-sum distributions. Management expected settlement expense to average approximately $0.8 million per quarter for the rest of 2017, subject to variation.
- On March 20, 2017, ArcBest amended its receivables securitization program, extending maturity to April 1, 2020 and increasing facility proceeds to $125 million, with a conditional $25 million accordion. At quarter-end, $35 million was borrowed and $72 million of capacity remained. ArcBest borrowed another $10 million in April, reducing capacity to $62 million.
- ArcBest acquired LDS in September 2016 for a stated transaction value of $25 million, including $8 million of contingent consideration subject to financial targets. Purchase accounting remained provisional.
Outlook, risks, and contingencies
- Capital spending: Estimated 2017 net capital expenditures were $145–$170 million, including $94 million for revenue equipment and approximately $32 million for real estate. Estimated 2017 depreciation and amortization was $105–$115 million. Management said spending could be adjusted to business levels.
- Near-term commentary: April 2017 Asset-Based billed revenue per day increased approximately 7% year over year, with tonnage per day up approximately 1%. Management cautioned that pricing trends may not continue. It expected a roughly $4.0 million second-quarter loss in “Other and eliminations,” including corporate costs and investments.
- Labor and pensions: Approximately 83% of Asset-Based employees were covered by the Teamsters agreement, which runs through March 31, 2018 and includes a 2.5% wage increase effective July 1, 2017. The Central States multiemployer pension plan was classified as critical and declining, with a projected 40% funded percentage at January 1, 2017. A separate fund in which ABF Freight participates was insolvent; approximately 1% of its multiemployer pension contributions went to that fund. Potential withdrawal liabilities and future contribution terms remain risks.
- Liquidity and commitments: Management believed cash, operating cash flow, and borrowing availability would meet foreseeable needs. The company reported $102.6 million of purchase obligations, with $95.3 million estimated due within one year, and $170.4 million of off-balance-sheet arrangements including purchase obligations and operating leases.
- Other risks and exposures: Risks include competitive pricing and freight demand, fuel costs and surcharge recovery, labor costs, seasonal and weather impacts, acquisitions, cybersecurity and systems disruptions, self-insurance claims, environmental matters, and financing covenant compliance. Environmental cleanup reserves were $0.5 million; management said routine legal matters were not expected to materially affect results, while noting estimates could change. The company was in compliance with credit and securitization covenants at quarter-end.
- Management did not expect ASC 606 revenue recognition adoption in 2018 to have a significant impact; it was still assessing the impact of lease accounting changes effective in 2019.
Most important facts for investors to verify
- Whether Asset-Based pricing and shipment growth improve profitability despite lower tonnage per day and smaller shipment sizes.
- Whether operating cash generation recovers and planned capital spending is supported by liquidity and borrowing capacity.
- Progress and costs from the corporate restructuring, including the expected second-quarter “Other and eliminations” loss.
- Developments in multiemployer pension funding, the March 2018 labor agreement expiration, and resulting contribution or withdrawal-liability exposure.
- Whether LDS meets its financial targets and how final purchase accounting and contingent consideration evolve.