ARCB

Arkansas Best Corporation (ARCBEST) - Q1 2010 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010. Arkansas Best Corporation is a holding company primarily engaged in motor carrier freight transportation through its subsidiary, ABF Freight System, Inc. (ABF). The company operates in a highly competitive less-than-truckload (LTL) environment and is significantly impacted by economic conditions, fuel prices, and labor costs. As of March 2010, 74% of ABF's employees were covered by a collective bargaining agreement with the International Brotherhood of Teamsters (IBT).

Key Financial Metrics

Note: Debt consists primarily of capital lease obligations. The company maintained $75.0 million in available borrowing capacity under an asset-backed securitization program with no borrowings outstanding as of March 31, 2010.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 5.1% on a per-day basis, driven by a 2.2% increase in ABF revenue per day. This was primarily due to higher fuel surcharge revenues (average rate 53% higher than Q1 2009) and a 3.3% increase in tonnage per day.
• Worsening Operating Loss: The operating loss widened by $6.7 million year-over-year. The ABF operating ratio deteriorated to 110.7% from 108.3%.
• Pricing Pressure: Despite a general rate increase implemented in January 2010, billed revenue per hundredweight decreased 1.0% year-over-year due to a competitive pricing environment and changes in freight profile (larger shipments).
• Cost Increases: Fuel costs rose significantly (average price per gallon up 48.3%). Salaries, wages, and benefits increased $2.9 million due to contractual wage increases, though this was partially offset by lower nonunion pension costs and suspended 401(k) contributions.
• Debt Expansion: Long-term debt increased by approximately $10 million due to new capital lease agreements entered in January 2010 to finance $11.4 million in revenue equipment.

Outlook, Risks, and Subsequent Events

• Subsequent Event - Labor Agreement: In April 2010, ABF reached a tentative agreement with the IBT for a 15% wage reduction (inclusive of scheduled increases) for contractual employees, subject to ratification. The agreement includes performance-based incentives and equal compensation reductions for nonunion employees. If implemented, this could reduce 2009 contractual wage costs by an estimated $70–$75 million.
• Outlook: Management expects the pricing environment to remain competitive throughout 2010. While tonnage showed modest improvement in Q1 2010 and April 2010, levels remain historically low. Profitability is heavily dependent on securing price increases to cover rising labor and fuel costs.
• Liquidity: The company anticipates receiving approximately $30 million in tax refunds in 2010 from loss carrybacks. Management believes existing cash, investments, and the $75 million securitization facility are sufficient to fund operations and capital expenditures.
• Risks: Key risks include prolonged recessionary conditions, inability to recover fuel costs via surcharges, competitive pricing pressures, and the uncertainty of the labor agreement ratification.

Investor Verification Checklist

• Union Ratification: Verify the outcome of the IBT vote on the 15% wage concession, as this is critical to future cost structures.
• Tonnage Trends: Monitor subsequent quarterly tonnage reports to confirm if the Q1 improvement is sustained or if levels revert to historical lows.
• Operating Ratio: Track the ABF operating ratio to see if it moves below 100% given the competitive pricing environment and rising fuel costs.
• Dividend Policy: Note the reduction in quarterly dividends from $0.15 (Q1 2009) to $0.03 (Q1 2010) and assess the sustainability of the current dividend level.
• Capital Expenditures: Review actual capital spending against the estimated $45 million plan for 2010, particularly regarding equipment replacement cycles.