ARCB

Arkansas Best Corp. 10-Q Summary: Quarter Ended September 30, 1997

Business Context and Reporting Period

This Form 10-Q covers the quarterly and nine-month periods ended September 30, 1997, for Arkansas Best Corporation, a diversified holding company. The Company's primary operations include less-than-truckload (LTL) and truckload motor carrier services, intermodal freight, and truck tire retreading and sales. Key subsidiaries include ABF Freight System, Inc., Treadco, Inc., and Clipper Worldwide. During the period, the Company exited its logistics segment and sold its truckload subsidiary, Cardinal Freight Carriers, Inc.

Key Financial Metrics

Note: Debt figures represent the sum of current portion of long-term debt ($19.6M) and long-term debt ($223.9M) as of September 30, 1997.

Material Changes vs. Prior Period

• Profitability Turnaround: The Company reported a net income of $5.8 million for the quarter, a significant improvement from a net loss of $8.5 million in the same period in 1996. For the nine months, net income was $10.5 million compared to a loss of $26.8 million in 1996.
• Asset Sales: The Company sold Cardinal Freight Carriers, Inc. (truckload operations) on July 15, 1997, for approximately $38 million, recognizing a pre-tax gain of $9.0 million. Additionally, the logistics segment (The Complete Logistics Company and Integrated Distribution Inc.) was sold, resulting in discontinued operations losses.
• Revenue Growth: Consolidated revenues increased 2.6% for the quarter and 3.4% for the nine months compared to 1996. LTL revenues grew 7.5% (quarter) and 4.1% (nine months), driven by favorable pricing and a UPS work stoppage. Tire operations revenues increased 16.9% (quarter) and 11.9% (nine months).
• Debt Reduction: Proceeds from the sale of Cardinal were used to pay off the Company's term loan in full and reduce revolver advances. Interest expense decreased to $5.3 million for the quarter from $7.7 million in 1996.
• Liquidity: Cash and cash equivalents decreased to zero by the end of the period, down from $2.4 million at year-end 1996, due to debt repayments and operating cash usage.

Guidance, Outlook, and Risks

• Outlook: Management believes current cash resources, available credit ($101 million under the Credit Agreement), and operating cash flows are sufficient to finance operations and meet debt service requirements.
• Union Relations: Approximately 81% of ABF employees are covered by a collective bargaining agreement with the International Brotherhood of Teamsters, expiring March 31, 1998. Wages and benefits increased by 3.9% effective April 1, 1997.
• Competition: Treadco faces increased pricing pressure and loss of national account business due to Bandag, Inc. granting additional franchises in Treadco's markets.
• Environmental Liabilities: The Company has accrued approximately $2.9 million for environmental liabilities related to underground storage tanks and hazardous waste sites. Upgrades to tank systems are required by December 1998.
• Seasonality: Motor carrier and intermodal operations typically see the highest tonnage in the third quarter and lowest in the first quarter.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the amended Credit Agreement covenants, particularly regarding indebtedness and financial tests, following the recent debt paydowns.
• Teamsters Contract: Monitor negotiations for the Teamsters contract expiring March 31, 1998, as labor costs are a significant portion of LTL expenses.
• Discontinued Operations: Confirm the final purchase price adjustments and tax implications for the sales of Cardinal Freight Carriers and the logistics subsidiaries.
• Environmental Accruals: Review the adequacy of the $2.9 million environmental accrual against potential future remediation costs at identified hazardous waste sites.
• Liquidity Position: Assess the impact of zero cash balances on short-term operational flexibility and reliance on the revolving credit facility.