ARCB

Arkansas Best Corp. (ARCBEST) - Q1 2001 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2001. Arkansas Best Corporation is a diversified holding company primarily engaged in motor carrier and intermodal transportation operations through subsidiaries ABF Freight System, G.I. Trucking, and Clipper Exxpress. The company previously operated a tire retreading business (Treadco), which was contributed to a joint venture (Wingfoot) in late 2000, removing it from consolidated operations for this period.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 9.6% year-over-year. This is primarily due to the exclusion of Treadco tire operations (which contributed $40.8 million in Q1 2000) following the formation of the Wingfoot joint venture in October 2000.
• Operating Income: Decreased 23.7% to $20.1 million, driven by lower operating income at ABF Freight System due to a 6.6% decline in LTL tonnage per day.
• Segment Performance:
  • ABF: Revenues slightly down; operating ratio worsened to 93.6% due to wage increases and higher fuel costs, partially offset by reduced rail utilization.
  • G.I. Trucking: Revenues increased 9.2% and operating ratio improved to 99.2% due to rate increases and yield improvements.
  • Clipper: Revenues increased 5.7%, but the segment operated at a loss (101.1% operating ratio) due to a strategic shift away from unprofitable LTL business and lower economic activity.
• Liquidity: Cash and cash equivalents decreased by $16.8 million during the quarter, primarily due to capital expenditures of $14.8 million and debt repayments.

Outlook, Risks, and Management Commentary

• Economic Slowdown: Management notes a continued slowdown in business levels resulting from a decline in the economy beginning in mid-2000. Tonnage and shipment levels across all segments were impacted.
• Capital Expenditures: The company reduced its 2001 capital expenditure forecast to no more than $85.0 million (down from a previous $90-$100 million range) due to the economic slowdown.
• Wingfoot Joint Venture: The company holds a 19% interest in Wingfoot Commercial Tire Systems, LLC. It has a "Put" right to sell this interest to Goodyear for approximately $74.0 million between April 2003 and April 2004. No profit or loss from Wingfoot is recognized during this period.
• Tax Contingency: The IRS has raised issues regarding the deductibility of contributions to multiemployer pension plans. An adverse decision could result in approximately $38.0 million in tax and interest liabilities. Management believes adequate provisions have been made and that the resolution will not have a material adverse effect on financial position.
• Interest Rate Risk: The company utilizes an interest rate swap on $110.0 million of borrowings to hedge against rising rates. As of March 31, 2001, the fair value of this swap represented a liability of $2.9 million.

Investor Verification Checklist

• Verify the impact of the ongoing economic slowdown on future tonnage volumes and pricing power across ABF, G.I. Trucking, and Clipper.
• Monitor the status of the IRS audit regarding multiemployer pension plan contributions and potential cash outflows of up to $38.0 million.
• Review the terms and timing of the "Put" option for the Wingfoot investment to assess potential future gains ($14 million pre-tax) or changes in equity accounting.
• Assess the sustainability of the operating ratio improvements at G.I. Trucking versus the deterioration at ABF and Clipper.
• Confirm compliance with debt covenants under the $250 million Credit Agreement, particularly regarding financial ratio tests.