Arkansas Best Corp. (ARCBEST) - 10-Q Summary
Business Context and Reporting Period
Company: Arkansas Best Corporation (holding company for ABF Freight System, Inc.)
Reporting Period: Quarter and nine months ended September 30, 2009
Business Overview: Primarily engaged in motor carrier freight transportation (Less-Than-Truckload). Operations are heavily influenced by economic conditions, fuel prices, and labor agreements with the International Brotherhood of Teamsters (covering ~76% of employees).
Key Financial Metrics
| Metric ($ thousands) | 3 Months Ended Sep 30, 2009 | 9 Months Ended Sep 30, 2009 | 9 Months Ended Sep 30, 2008 |
|---|---|---|---|
| Operating Revenues | $398,957 | $1,101,269 | $1,441,840 |
| Operating Income (Loss) | $(12,237) | $(68,136) | $64,326 |
| Net Income (Loss) Attributable to ARCBEST | $(5,573) | $(39,173) | $40,142 |
| Diluted EPS | $(0.23) | $(1.58) | $1.56 |
| Cash and Cash Equivalents | $58,887 | $58,887 | $157,453 |
| Short-Term Investments | $131,365 | $131,365 | $117,855 |
| Total Liquidity (Cash + ST Inv) | $190,252 | $190,252 | $275,308 |
| Long-Term Debt | $1,618 | $1,618 | $1,457 |
| Operating Ratio (ABF Segment) | 103.8% | 106.5% | 95.4% |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 19.5% (quarterly) and 23.0% (year-to-date) on a per-day basis compared to 2008. This was driven by a 10.1% decline in tonnage per day and a 13.6% decrease in billed revenue per hundredweight (largely due to lower fuel surcharges).
- Profitability Reversal: The company reported an operating loss of $68.1 million for the nine months ended September 30, 2009, compared to operating income of $64.3 million in the same period of 2008. This marks the fourth consecutive quarter of net losses.
- Operating Ratio Deterioration: ABF's operating ratio increased to 106.5% for the nine months ended September 30, 2009, from 95.4% in 2008. Costs as a percentage of revenue rose due to fixed cost structures and contractual wage increases not fully offset by rate increases.
- Liquidity Reduction: Cash and short-term investments declined by $28.5 million from year-end 2008, utilized for capital expenditures ($29.2 million net), dividends ($11.6 million), and an acquisition ($6.2 million).
Guidance, Outlook, Risks, and Unusual Items
- Credit Agreement Covenant Risk: The company's fixed charge coverage ratio was 2.0 to 1 as of September 30, 2009, which is the minimum required by its Credit Agreement. Management warns that unless Q4 2009 results improve over Q4 2008 levels, the company may not meet the ratio for the December 31, 2009 reporting period. Management is seeking an amendment to the Credit Agreement.
- Pension Settlement Expense: Due to higher retirements, the company anticipates a non-cash pension settlement expense in Q4 2009. Estimates range from $6.0 million to $8.0 million (pre-tax) for the nonunion plan and approximately $4.6 million (pre-tax) for the supplemental plan.
- Goodwill Impairment Risk: Given the prolonged economic downturn, there is a risk that future goodwill impairment tests could result in material non-cash adjustments if forecasted cash flows are revised downward.
- Competitive Environment: Pricing remains highly competitive. While fuel surcharges have declined, base LTL rates have not increased sufficiently to cover rising contractual labor costs.
Investor Verification Checklist
- Covenant Compliance: Verify the company's ability to meet the fixed charge coverage ratio for the December 31, 2009 period and the status of Credit Agreement amendments.
- Pension Liabilities: Monitor the actual Q4 2009 pension settlement expense against the estimated range of $10.6 million to $12.6 million total pre-tax charge.
- Tonnage Trends: Track October and November tonnage data to assess if the 10.1% year-over-year decline in Q3 has stabilized or worsened.
- Capital Expenditures: Confirm if the $45.0 million estimated 2009 capital expenditure plan remains on track given the revenue decline.
- Goodwill Valuation: Review future filings for any impairment charges related to the $66.7 million goodwill balance.