ArcBest(ARCB) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements and management's financial analysis Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, reflecting the reclassification of FleetNet as a discontinued operation Consolidated Balance Sheets Total assets decreased slightly to $2.41 billion at June 30, 2023, while total stockholders' equity increased to $1.21 billion Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $865,190 | $989,783 | | Total Assets | $2,414,102 | $2,494,286 | | Total Current Liabilities | $641,266 | $768,470 | | Total Liabilities | $1,202,741 | $1,342,885 | | Total Stockholders' Equity | $1,211,361 | $1,151,401 | - Assets and liabilities of discontinued operations (FleetNet) were $75.8 million and $52.4 million respectively at Dec 31, 2022, and are zero as of June 30, 2023, following the sale[7] Consolidated Statements of Operations Q2 2023 revenues decreased to $1.10 billion, leading to a significant drop in operating income to $42.1 million Consolidated Operations Highlights (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,103,464 | $1,321,692 | $2,209,558 | $2,589,783 | | Operating Income | $42,116 | $136,038 | $63,275 | $228,981 | | Net Income from Continuing Operations | $39,600 | $101,542 | $58,447 | $169,550 | | Diluted EPS from Continuing Operations | $1.60 | $3.97 | $2.35 | $6.58 | - The company recognized significant income from discontinued operations of $53.3 million for the first six months of 2023, primarily due to the gain on the sale of FleetNet[9] Consolidated Statements of Comprehensive Income Total comprehensive income for Q2 2023 was $40.6 million, a decrease from $102.1 million in Q2 2022 Comprehensive Income (in thousands) | Metric | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $40,443 | $102,461 | $111,726 | $172,030 | | Other Comprehensive Income (Loss) | $183 | $(349) | $(534) | $1,275 | | Total Comprehensive Income | $40,626 | $102,112 | $111,192 | $173,305 | Consolidated Statement of Stockholders' Equity Stockholders' equity increased to $1.21 billion driven by net income, partially offset by treasury stock purchases and dividends Changes in Stockholders' Equity (6 Months Ended June 30, 2023, in thousands) | Description | Amount | | :--- | :--- | | Balance at Dec 31, 2022 | $1,151,401 | | Net Income | $111,726 | | Other Comprehensive Loss | $(534) | | Purchase of Treasury Stock | $(41,240) | | Dividends Declared | $(5,809) | | Share-based Compensation & Other | $(4,183) | | Balance at June 30, 2023 | $1,211,361 | Consolidated Statements of Cash Flows Net cash from operating activities decreased to $103.8 million for the first six months of 2023, while investing activities provided $30.5 million Cash Flow Summary (6 Months Ended June 30, in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $103,757 | $184,623 | | Net Cash from (used in) Investing Activities | $30,456 | $(74,844) | | Net Cash used in Financing Activities | $(105,299) | $(59,341) | | Net Increase in Cash | $28,914 | $50,438 | | Cash at End of Period | $187,286 | $127,058 | - The sale of discontinued operations (FleetNet) provided $100.9 million in cash proceeds during the first six months of 2023[18] Notes to Consolidated Financial Statements The notes provide detailed disclosure on accounting policies and financial statement components, including segment performance and the FleetNet sale NOTE A – ORGANIZATION AND DESCRIPTION OF THE BUSINESS AND FINANCIAL STATEMENT PRESENTATION ArcBest operates through Asset-Based and Asset-Light segments, with FleetNet reclassified as discontinued operations after its sale - The company operates through two main segments: Asset-Based, which contributed ~63% of total revenues in the first six months of 2023, and Asset-Light[20][21] - A new 5-year collective bargaining agreement (2023 ABF NMFA) was ratified, effective July 1, 2023. It includes annual wage increases, profit-sharing bonuses, and increased benefit contributions, with an estimated 4.2% compounded annual increase in top hourly wage and benefit rates[21][22] - The company sold its FleetNet subsidiary for $100.9 million on Feb 28, 2023. FleetNet's results are now reported as discontinued operations, and prior periods have been reclassified[23] NOTE B – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS The contingent consideration liability for MoLo increased to $117.0 million due to revised growth assumptions, impacting fair value measurements Cash and Short-Term Investments (in thousands) | Category | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $187,286 | $158,264 | | Short-term investments | $153,116 | $167,662 | - The fair value of the contingent consideration liability for the MoLo acquisition increased by $5.0 million to $117.0 million during the first six months of 2023. This was due to revised assumptions for business growth in 2024 and 2025, partially offset by softer 2023 market conditions[38][41] - The fair value of the company's equity investment in Phantom Auto increased by $3.7 million based on an observable price change from a new funding round[43] NOTE C – DISCONTINUED OPERATIONS ArcBest sold FleetNet for $100.9 million, resulting in a pre-tax gain of $70.2 million, with its results now reported as discontinued operations - The company sold FleetNet for $100.9 million, recording a pre-tax gain of $70.2 million ($52.3 million after tax)[44] Financial Results from Discontinued Operations (in thousands) | Metric | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | | Revenues | $55,929 | $138,220 | | Gain on sale of business | $(70,215) | — | | Income from discontinued operations, net of tax | $53,279 | $2,480 | NOTE D – GOODWILL AND INTANGIBLE ASSETS Goodwill remained at $304.8 million, primarily from Asset-Light acquisitions, while net intangible assets decreased due to amortization - The goodwill balance of $304.8 million at June 30, 2023, primarily relates to the Asset-Light segment acquisitions of MoLo and Panther[49] Future Amortization of Intangible Assets (in thousands) | Period | Amount | | :--- | :--- | | Remainder of 2023 | $6,394 | | 2024 | $12,778 | | 2025 | $12,778 | | 2026 | $8,671 | | 2027 | $7,247 | | Thereafter | $27,299 | | Total | $75,167 | NOTE E – INCOME TAXES The effective tax rate from continuing operations was 19.1% for the first half of 2023, influenced by state taxes and tax credits Effective Tax Rate from Continuing Operations | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended June 30 | 18.6% | 22.9% | | Six Months Ended June 30 | 19.1% | 23.6% | - The 2023 effective tax rate was impacted by the reinstatement of the federal alternative fuel tax credit[53] - The company paid $77.8 million in federal, state, and foreign income taxes during the first six months of 2023, compared to $56.4 million in the same period of 2022[55] NOTE F – LEASES Operating lease expense increased to $22.4 million for the first six months of 2023, with future payments totaling $241.0 million Total Operating Lease Expense (in thousands) | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended June 30 | $11,805 | $8,338 | | Six Months Ended June 30 | $22,397 | $16,236 | - As of June 30, 2023, total future lease payments under operating leases were $241.0 million, with a present value (lease liability) of $205.2 million[59] NOTE G – LONG-TERM DEBT AND FINANCING ARRANGEMENTS Total long-term debt decreased to $233.0 million, including $50.0 million on the revolving credit facility and $183.0 million in notes payable Long-Term Debt (in thousands) | Category | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Credit Facility | $50,000 | $50,000 | | Notes payable | $182,987 | $214,623 | | Total Debt | $232,987 | $264,623 | - The company has a $250.0 million revolving credit facility maturing in October 2027, with $200.0 million available borrowing capacity as of June 30, 2023[65] - An accounts receivable securitization program provides $50.0 million in available proceeds, of which $40.0 million was available as of June 30, 2023, after issuing $10.0 million in standby letters of credit[70][72] NOTE H – STOCKHOLDERS' EQUITY Stockholders' equity increased, driven by net income and partially offset by $41.2 million in treasury stock repurchases under a reauthorized program - The company declared dividends of $0.12 per share in Q1 and Q2 2023, totaling $5.8 million for the six-month period[83] - In February 2023, the Board reauthorized the share repurchase program and increased the total amount available to $125.0 million[84] - During the first six months of 2023, the company repurchased 453,296 shares for $41.2 million, leaving $83.8 million available under the program as of June 30, 2023[85] NOTE I – EARNINGS PER SHARE Diluted EPS from continuing operations was $2.35 for the first six months of 2023, with total diluted EPS at $4.49 Diluted Earnings Per Share | Category | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Continuing operations | $1.60 | $3.97 | $2.35 | $6.58 | | Discontinued operations | $0.03 | $0.04 | $2.14 | $0.10 | | Total diluted EPS | $1.64 | $4.00 | $4.49 | $6.68 | NOTE J – OPERATING SEGMENT DATA Asset-Based revenues were $1.42 billion with $90.8 million operating income, while Asset-Light revenues were $847.9 million with an operating loss Segment Revenues (6 Months Ended June 30, in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Asset-Based | $1,419,832 | $1,507,933 | | Asset-Light | $847,908 | $1,144,939 | | Other and eliminations | $(58,182) | $(63,089) | | Total Consolidated | $2,209,558 | $2,589,783 | Segment Operating Income (Loss) (6 Months Ended June 30, in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Asset-Based | $90,796 | $196,690 | | Asset-Light | $(911) | $48,595 | | Other and eliminations | $(26,610) | $(16,304) | | Total Consolidated | $63,275 | $228,981 | NOTE K – LEGAL PROCEEDINGS, ENVIRONMENTAL MATTERS, AND OTHER EVENTS The company faces lawsuits related to a pre-acquisition auto accident and agreed to pay a $0.5 million civil penalty for Clean Water Act issues - The company and its subsidiary MoLo are defendants in lawsuits related to a pre-acquisition auto accident. A loss is deemed reasonably possible and could be material, but an amount cannot be estimated[103] - In March 2023, ABF Freight entered a consent decree with the EPA and will pay a $0.5 million civil penalty to resolve alleged Clean Water Act compliance issues[108] - The company is appealing a Notice of Assessment from a state regarding an ongoing sales and use tax audit but does not believe the resolution will have a material adverse effect[109] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 14.7% consolidated revenue decrease for H1 2023 due to market softness, impacting both segments and liquidity Consolidated Results Consolidated revenues for H1 2023 decreased 14.7% to $2.21 billion, with operating income dropping to $63.3 million due to market softness Consolidated Revenue and Operating Income (6 Months Ended June 30, in millions) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $2,209.6 | $2,589.8 | (14.7%) | | Operating Income | $63.3 | $229.0 | (72.4%) | - Innovative technology costs, including the Vaux freight handling program, impacted consolidated results by $27.3 million (pre-tax) in the first half of 2023, up from $20.0 million in the prior year period[125] - The remeasurement of the MoLo contingent earnout consideration reduced consolidated results by a $5.0 million (pre-tax) expense in the first half of 2023[126] Consolidated Adjusted EBITDA Consolidated Adjusted EBITDA from continuing operations decreased significantly to $154.4 million for H1 2023, reflecting lower operating performance Consolidated Adjusted EBITDA from Continuing Operations (in thousands) | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended June 30 | $76,301 | $171,865 | | Six Months Ended June 30 | $154,405 | $301,988 | Asset-Based Operations Asset-Based segment revenues decreased 5.8% to $1.42 billion, with operating income falling to $90.8 million due to lower rates and mix shift Asset-Based Segment Results (6 Months Ended June 30) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Revenues | $1,419.8M | $1,507.9M | | Operating Income | $90.8M | $196.7M | | Operating Ratio | 93.6% | 87.0% | - A new 5-year collective bargaining agreement (2023 ABF NMFA) was implemented retroactive to July 1, 2023, and is expected to increase the combined wage and benefits top hourly rate by approximately 4.2% on a compounded annual basis[148] - The company noted that a large LTL competitor ceased operations on July 30, 2023, which is expected to cause short-term market disruption and a possible increase in shipment levels[149] Asset-Light Operations Asset-Light segment revenues decreased 25.9% to $847.9 million, resulting in an operating loss of $0.9 million due to market softness Asset-Light Segment Results (6 Months Ended June 30) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Revenues | $847.9M | $1,144.9M | | Operating Income (Loss) | $(0.9)M | $48.6M | | Operating Ratio | 100.1% | 95.8% | Asset-Light Key Operating Statistics (% Change YoY, 6 Months Ended June 30, 2023) | Metric | % Change | | :--- | :--- | | Revenue per shipment | (30.3%) | | Shipments per day | 2.3% | - Operating results for the first half of 2023 were reduced by a $5.0 million expense from the change in fair value of the MoLo contingent earnout consideration[185] Current Economic Conditions, Inflation, and Other Factors Challenging economic conditions, including inflation and slowing manufacturing, have softened demand and impacted pricing and costs - The Manufacturing PMI, a key industry indicator, was 46.4% for July 2023, marking the nine consecutive months of economic contraction in the manufacturing sector[196] - The company is piloting electric forklifts, yard tractors, and straight trucks and is implementing City Route Optimization (CRO) technology to reduce emissions and improve efficiency[205] - Cybersecurity is a key focus, with investments in safeguards, backup systems, and a disaster recovery plan to mitigate risks from potential attacks, especially with hybrid and remote work arrangements[210][211] Liquidity and Capital Resources Liquidity remains strong with $340.4 million in cash and investments, with estimated 2023 capital expenditures of $270-$295 million - Total cash, cash equivalents, and short-term investments stood at $340.4 million as of June 30, 2023[218] - The 2023 capital expenditure plan is estimated to be between $270.0 million and $295.0 million, net of asset sales, including approximately $165.0 million for revenue equipment[233] - The company has $200.0 million available under its revolving credit facility and $40.0 million under its accounts receivable securitization program as of June 30, 2023[234] Balance Sheet Changes and Income Taxes Significant balance sheet changes include decreased accounts receivable and accrued expenses, with an effective tax rate of 19.1% for H1 2023 - Accounts receivable decreased by $87.9 million due to lower revenue levels and improved collections[240] - Accrued expenses decreased by $39.1 million, primarily due to payments for performance-based incentive plans accrued at year-end 2022[244] Reconciliation of Effective Tax Rate (Continuing Operations, 6 Months Ended June 30, 2023) | Description | Rate | | :--- | :--- | | Statutory federal rate | 21.0% | | State income tax provision | 4.6% | | Tax benefit from vested RSUs | (6.8%) | | Other items, net | 0.3% | | Total Provision for Income Taxes | 19.1% | Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risk is from interest rate fluctuations on variable-rate debt, partially mitigated by an interest rate swap - The primary market risk is from interest rate fluctuations on variable-rate debt under the revolving credit facility and AR securitization program[260] - The company uses an interest rate swap agreement to mitigate a portion of the interest rate risk associated with its $50.0 million in borrowings under the revolving credit facility[61][260] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[262] - No changes occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting[263] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings Detailed information regarding the company's legal proceedings is provided in Note K to the Consolidated Financial Statements - Information regarding legal proceedings is detailed in Note K to the Consolidated Financial Statements[265] Item 1A. Risk Factors No material changes to the company's risk factors have occurred since the filing of the 2022 Annual Report on Form 10-K - No material changes to the company's risk factors have occurred since the filing of the 2022 Annual Report on Form 10-K[266] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 299,207 shares for $27.2 million in Q2 2023 under its reauthorized share repurchase program Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased | Average Price Paid | Approx. Value Remaining in Program | | :--- | :--- | :--- | :--- | | Apr 2023 | 171,967 | $92.28 | $95,038,000 | | May 2023 | 127,240 | $88.64 | $83,760,000 | | Jun 2023 | 0 | N/A | $83,760,000 | | Total | 299,207 | | $83,760,000 | - In February 2023, the Board increased the total amount available for share repurchases to $125.0 million[268] Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2023 - No directors or officers adopted or terminated a Rule 10b5-1 trading arrangement during the three months ended June 30, 2023[270] Item 6. Exhibits This section lists the exhibits filed with the report, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906, and Inline XBRL documents[273]