ArcBest Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The company provides freight transportation and logistics services through ABF Freight and four non-asset-based segments. It changed its name from Arkansas Best Corporation and its Nasdaq ticker to ARCB in May 2014. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $711.3 | $623.4 | $1,947.8 | $1,721.0 |
| Operating income | $32.9 | $20.5 | $51.2 | $5.6 |
| Operating margin | 4.6% | 3.3% | 2.6% | 0.3% |
| Net income | $19.6 | $14.0 | $31.6 | $5.5 |
| Diluted EPS | $0.72 | $0.52 | $1.16 | $0.20 |
| Operating cash flow | Not separately reported for quarter | $118.2 | $66.3 |
- Revenue grew 14.1% in Q3 and 13.2% year to date. Net income and EPS rose substantially, although prior-year nine-month earnings benefited from a $2.5 million tax benefit related to alternative-fuel credits and deferred-tax valuation allowances.
- Operating margin improved to 4.6% in Q3 from 3.3%; the nine-month margin rose to 2.6% from 0.3%. ABF Freight’s operating ratio improved 1.0 percentage point in Q3 and 2.4 points year to date.
- At September 30, cash and cash equivalents were $159.4 million, short-term investments $43.9 million, and unrestricted cash and short-term investments combined $203.2 million. Current assets were $524.5 million and current liabilities $395.5 million.
- Total debt was $125.8 million, including $40.1 million current; it was $112.8 million at December 31, 2013. The company had no borrowings under its $75 million receivables securitization facility, with $57.2 million available after letters of credit. It reported compliance with debt covenants.
- Operating cash flow of $118.2 million funded investing outflows of $37.6 million and financing outflows of $26.6 million; cash increased $54.0 million during the nine months. Revenue-equipment purchases included $41.0 million financed with notes payable.
- Quarterly dividends remained $0.03 per share during Q3. On October 24, the board declared a $0.06-per-share dividend, double the prior rate.
Changes and operating drivers
- All segments reported revenue growth. Non-asset-based segments’ combined revenue increased 22.7% in Q3 and 26.9% year to date; their combined operating income increased to $9.2 million in Q3 from $6.3 million and to $20.2 million year to date from $10.2 million.
- ABF Freight revenue increased 11.1% in Q3 and 9.1% year to date. Tonnage per day rose 6.4% and 5.7%, respectively, while billed revenue per hundredweight, including fuel surcharge, increased 3.0% and 2.7%.
- ABF Freight benefited from revenue growth and labor-cost reductions under the collective bargaining agreement implemented in November 2013. However, lower productivity, increased purchased transportation, maintenance costs, and benefit-rate increases partly offset those gains. Management estimated first-quarter severe winter weather reduced ABF Freight operating results by about $10.5 million.
- Q3 segment revenue growth was particularly strong at ABF Logistics (+41.9%) and Panther (+25.7%). Panther’s year-to-date operating income increased to $11.8 million from $3.7 million. FleetNet’s Q3 operating income declined slightly, partly reflecting investments in personnel and technology.
Outlook, risks, and unusual items
- Management estimated 2014 capital expenditures, net of asset-sale proceeds, at $90–$100 million, including about $60 million for ABF Freight equipment replacements; year-to-date spending on this basis, including financed purchases, was $62.1 million. Estimated 2014 depreciation and amortization was $85–$90 million.
- Management expected Q4 pension settlement expense of $1–$2 million for the nonunion defined-benefit plan and $0.5–$1 million for the supplemental benefit plan. Further nonunion plan settlement expense was expected to fluctuate with lump-sum distributions, asset returns, and discount rates.
- October 2014 ABF Freight average daily tonnage was approximately 11% above October 2013, while billed revenue per hundredweight including fuel surcharge was approximately flat. ABF Freight implemented a nominal 5.4% increase to LTL base tariffs effective November 3; management cautioned that pricing gains may not continue.
- The ABF labor agreement runs through March 31, 2018. About 79% of ABF Freight employees were covered. Management cited competitive labor costs, multiemployer benefit contributions, productivity, fuel-surcharge recovery, and equipment maintenance as important operating factors.
- About half of ABF Freight’s multiemployer pension contributions went to the Central States plan, which was reported 47.6% funded as of January 1, 2013 and remained in critical status in 2014. Withdrawal from certain plans could create material liabilities; the company said it had no intention to withdraw.
- A citizens group sued ABF Freight over alleged Clean Water Act storm-water permit violations at its Kent, Washington facility, seeking fines and injunctive relief. The case was at an early stage; loss likelihood and penalties could not be determined, and no liability was recorded. Environmental cleanup reserves were $0.9 million.
- The company cited economic and freight-demand conditions, competition and pricing, labor and pension costs, fuel prices and surcharge recovery, weather, financing availability, cybersecurity and systems disruptions, and possible impairment of Panther goodwill and intangibles among relevant risks. No material cybersecurity incident was reported.
- After quarter-end, on November 5, the company entered into a $50 million forward-starting interest-rate swap, in contemplation of a probable credit-agreement amendment and increased borrowing capacity. The receivables facility matured June 15, 2015; the company was negotiating an extension.
Important facts for investors to verify
- Whether ABF Freight can sustain revenue and pricing growth while improving productivity and controlling purchased-transportation, maintenance, and labor costs.
- Actual Q4 pension settlement charges and their effect on earnings; distinguish these charges and tax items from recurring operating performance.
- Progress on extending the receivables securitization facility and the terms and status of the contemplated credit-agreement changes.
- Updates on the Kent storm-water litigation and the funding condition and contribution exposure of multiemployer pension plans.
- Actual 2014 capital spending, financed equipment purchases, and dividend payments compared with management’s plans.