Arkansas Best Corporation (NASDAQ: ABFS) — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. Arkansas Best provides freight transportation and logistics through five segments; its asset-based ABF Freight business generated about 75% of revenue before other revenues and eliminations.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Operating revenue | $2.300 billion | $2.066 billion |
| Operating income (loss) | $19.1 million | $(14.6) million |
| Net income (loss) attributable to Arkansas Best | $15.8 million | $(7.7) million |
| Diluted EPS | $0.59 | $(0.31) |
| Cash provided by operating activities | $93.5 million | $84.5 million |
| Total assets | $1.017 billion | $1.034 billion |
| Total debt, including current portion | $112.8 million | $156.0 million |
Consolidated operating margin was approximately 0.8%, compared with a loss margin of approximately 0.7% in 2012. Fourth-quarter 2013 revenue was $578.5 million, operating income $13.5 million, net income attributable to Arkansas Best $10.3 million, and diluted EPS $0.38; fourth-quarter 2012 had revenue of $537.0 million and an operating loss of $11.0 million.
Unrestricted cash, cash equivalents, and short-term investments totaled $141.3 million at year-end ($105.4 million of cash and equivalents); restricted funds were $1.9 million. The company generated $93.5 million in operating cash, repaid $43.2 million of long-term debt, spent $24.2 million on net capital expenditures, acquired a logistics business for $4.1 million net cash, and paid $3.2 million in dividends. The $83.8 million secured term loan matures in June 2017. The $75 million receivables facility had no borrowings and $54.7 million of borrowing capacity after letters of credit. The company reported compliance with debt covenants; its fixed-charge coverage ratio was 2.21:1 against a 1.25:1 minimum.
Material changes and segment performance
- Revenue increased 11.3%, reflecting higher volume across segments and a full year of Panther results versus only the post-acquisition period in 2012.
- ABF Freight revenue rose 3.7% per workday as tonnage per day increased 3.6%. Its operating result improved to $10.0 million income from a $19.8 million loss; its operating ratio improved to 99.4% from 101.2%.
- Non-asset-based segments contributed $571.8 million of revenue, about 25% of revenue before other revenues and eliminations. Panther reported $246.8 million revenue and $7.0 million operating income. Domestic & Global Transportation Management revenue rose 58.4% to $105.2 million and operating income was $3.0 million. Emergency & Preventative Maintenance revenue rose 18.6% to $137.5 million, with $3.3 million operating income. Household Goods Moving revenue rose 5.9% to $82.2 million, with $1.9 million operating income.
- ABF Freight’s new Teamsters agreement, implemented November 3, 2013 and expiring March 31, 2018, reduced wage rates 7% at implementation. After benefit-rate increases, the initial combined contractual wage and benefit rate reduction was estimated at about 4%; future combined rate increases are estimated at 2.5%–3.0% annually on a compounded basis.
- ABF Freight’s labor costs declined to 61.0% of revenue from 62.9%. Fuel, supplies, and expenses declined to 18.9% from 19.4%, while rents and purchased transportation increased to 10.3% from 9.2%, partly reflecting greater rail use.
Outlook, risks, and unusual items
- Management estimated 2014 net capital expenditures of $90–$100 million, including about $60 million for ABF Freight equipment replacements; depreciation and amortization was estimated at $85–$90 million. Spending may be adjusted to business levels.
- Through late February 2014, ABF Freight tonnage was up 1%–2% year over year and revenue up approximately 2%–3%; severe winter weather made tonnage lower than expected. Management estimated January weather reduced operating income by about $6 million; February’s impact was not yet available.
- The company froze its nonunion defined-benefit pension accrual effective July 1, 2013. The plan’s reported funded status improved substantially, and January 2014 annuity purchase and lump-sum distributions were expected to produce $2–$3 million of first-quarter 2014 pretax settlement expense. Management expected 2014 pension expense, before settlement expense, to be lower than 2013.
- Significant risks include competition and pricing pressure, fuel-price changes and limits on surcharge recovery, labor relations and future contract costs, and multiemployer pension exposure. About 63% of ABF Freight’s multiemployer pension contributions went to plans in critical status; the Central States plan was reported 47.6% funded, and received about half of ABF Freight’s pension contributions.
- Other risks include claims and insurance costs, equipment replacement needs, weather and seasonality, regulatory and environmental compliance, third-party carrier availability, and cybersecurity. The company disclosed prior attempted cyberattacks but no known incident with a material effect. Environmental cleanup reserves were $0.9 million; ordinary-course legal matters were not expected to have a material adverse effect, and a previously disclosed ABF/YRC labor-contract lawsuit was concluded in 2013.
- Goodwill was $76.4 million and net intangible assets $75.4 million, primarily related to Panther. No impairment was recorded, but the estimated value of the Panther trade name was less than $1 million above its carrying amount, leaving limited valuation headroom.
- Management expects to continue quarterly dividends, subject to board discretion and financial conditions. The quarterly dividend was $0.03 per share; no shares were repurchased in 2013.
Key investor verification points
- Check whether ABF Freight sustains tonnage and pricing gains and improves its operating ratio, particularly after the full-year impact of the labor agreement.
- Track 2014 equipment spending, maintenance costs, and the effect of winter weather on operating performance and cash generation.
- Review the status and contribution requirements of critical multiemployer pension plans, especially Central States, and any developments in withdrawal-liability exposure.
- Assess Panther’s growth and margins against the limited valuation cushion disclosed for its trade name and goodwill impairment assumptions.
- Monitor debt repayment, covenant headroom, borrowing availability, claims reserves, and the sustainability of dividends alongside planned capital expenditures.